This week, Congress is working to put together a package that would make a hodgepodge of temporary taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. provisions permanent. Although not all extenders in the package are worth keeping, it is a decent solution to make them permanent. At the very least, extenders such as bonus expensing—one of the best extenders—will be a permanent part of the tax code.
An odd narrative surrounding the permanent package has popped up. Many claim that making the tax extenders permanent would be costly to the Treasury. This narrative comes from a revenue estimate that states that the government could lose more than $800 billion in tax revenue over the next decade if this extenders package were made permanent. Politico characterized this package as “budget-busting.”
I think this narrative is odd and a little misleading. A permanent extenders package probably won’t lose much more revenue over what the federal government was going to collect over the next decade anyway. The exception here being the expanded provisions contained in this package.
Let me explain.
When the CBO measures what tax revenue and spending will be over the next decade it looks at all the provisions contained in current law. The estimates include any provisions that if left untouched, would phase-out or expire. It is a little like a baseline estimate if the government were left on autopilot. This is a reasonable way to estimate how legislation will impact the government finances, but it is not perfect.
The extenders are a perfect example of what the current law baseline can miss. Under current law, extenders have already expired. So current law estimates assume that the federal government will collect revenue as if the extenders are no longer there.
However, this does not reflect our recent experiences with the extenders. Every year, for the past several years, Congress has retroactively extended the extenders and reduced actual revenues that the CBO believes the Treasury will collect. And there is no reason to believe that this would not keep happening. However, CBO’s current law baseline will still assume that the government will collect revenue over the next decade as if the extenders didn’t exist. In other words, the CBO current law baseline likely overstates the amount of revenue that the federal government will actually collect over the next decade.
So what happens when you make the extenders permanent? Their ten-year revenue loss, which the federal government would have likely experienced anyway, becomes part of the current law baseline estimate. So when CBO estimates their “cost,” it appears as though it loses revenue, but those estimates assume an arguably unrealistic baseline.
This isn’t to say that the total revenue impact of this bill isn’t large. $800 billion is real money and Congress can’t completely ignore the deficit forever. However, I think a better narrative here is that a permanent extenders package will allow for a more honest accounting of the federal government’s finances.
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