In a last-minute deal, lawmakers have agreed to revive several expiring 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. breaks, including many that have been gone for nearly two years. Unfortunately, this deal represents the worst of tax policy, continuing the tradition of retroactive and temporary extensions rather than answering the question of which provisions deserve permanent status.
The year-end tax deal will come at a cost of $428 billion, according to the Joint Committee on Taxation (JCT)—$39 billion from the extension of temporary tax policies, many of which have been expired since the end of 2017. The expired provisions broadly fall into four categories of provisions: energy, cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. , business, and individual.
Most extenders would receive a new expiration date at the end of 2020, though two, the biodiesel and renewable diesel provision and the 45G railroad track maintenance credit, would be extended through 2022. Those that had already expired at the end of 2017 and 2018 would be retroactively extended as well.
It is not clear what objective Congress is trying to achieve by changing the tax code of the past. No one can go back in time and invest or purchase differently with the tax code of 2018 and 2019 suddenly changed. Instead, retroactive extension of these policies will amount to an after-the-fact transfer, or windfall, to these companies and individuals if they determine it’s worth the hassle of claiming a retroactive tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. .
Likewise, another temporary extension will not be effective in boosting long-run productivity or growth. Businesses and individuals will be in a similar spot come December 2020—will the provisions expire or be extended again?
The deal does address some items from the Tax Cuts and Jobs Act (TCJA): eliminating an issue with the “kiddie tax,” repealing a tax on fringe benefits of nonprofits, and extending for one year the alcohol excise tax reforms that were set to expire at the end of 2019. Missing from the deal, however, are several important items that were on the congressional to do list, such as fixing the “Retail Glitch” and addressing other technical corrections to the 2017 tax law.
Three of the largest tax changes in the deal, accounting for about $373 billion of the cost, are repeals of taxes that were created as part of the Affordable Care Act—the health insurance tax, the so-called Cadillac taxThe Cadillac Tax is a 40 percent tax on employer-sponsored health care coverage that exceeds a certain value. The aim: to curb health-care cost growth, reduce favorable tax treatment of employer-provided insurance, and help fund the Affordable Care Act (ACA). It was repealed in late 2019 before taking effect. , and the medical device tax. Finally, the bill contains provisions related to disaster tax relief, totaling $12.7 billion, and changes to retirement savings, all totaling $428 million.
Ultimately, this is business as usual in Washington—waiting well past the last minute (remember, most of these tax breaks have been expired since the end of 2017) to address unfinished business in tax policy. If lawmakers want a tax code that is neutral and economically efficient, this is not the way to go.
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