An upcoming House Ways and Means 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. Policy Subcommittee hearing will discuss the more than decade-long ritual of voting at the last minute to extend a collection of temporary tax provisions teetering on the edge of expiration. Most recently, in February 2018, Congress elected to retroactively extend 32 of these provisions for tax year 2017, after they expired at the close of 2016. But now, lawmakers are going to evaluate whether such haphazard policy has a place in the post-Tax Cuts and Jobs Act (TCJA) world, a first step that could perhaps lead to settling the fate of tax extenders for good.
With the TCJA’s reduction in the corporate tax rate and immediate expensing of equipment allowing businesses to operate in a more competitive environment, this is an opportune time to rethink whether narrow, temporary tax breaks have a place in the new tax code. Those specific provisions of the tax bill will encourage additional capital formation, because they move closer to a neutral, pro-growth tax system, while contrastingly, most tax extenders move the tax code in the opposite direction.
Congress should consider which, if any, extenders are good policy worth permanence and which should be eliminated for good, ending this ritual of temporary, ad hoc tax policy. Given that Congress did not make these provisions permanent during the TCJA debate signals that Congress already knows the answer.
Many of these constantly expiring tax breaks were originally designed to phase out, often because they were part of temporary bills like the stimulus package. Some have become popular enough that they are difficult to eliminate, but not so popular that they have made their way to tax code permanence. Others, such as the R&D credit and the Section 179 deduction, for example, were regarded as genuinely good policies and made permanent in 2015. After several extenders were made permanent, Congress was less pressured to renew the remaining extenders, and as a result, 36 tax provisions expired at the close of 2016. But in 2018, Congress elected to retroactively extend 32 of the already expired breaks for 2017.
These 32 remaining provisions fall into three general categories: renewable energy incentives, provisions for homeowners, and miscellaneous provisions.
Seventeen of the provisions that were retroactively extended for 2017 are tax incentives for renewable energy. Most of these provisions are tax credits—for electric vehicles, residential energy equipment, biodiesel, and more. Some of the provisions allow for more favorable depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. and cost-recovery, which helps shift the tax code towards full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. . In all, these provisions are expected to reduce federal tax revenue by $6.2 billion in 2018.
Two provisions are targeted at homeowners. One exempts homeowners from being taxed on the amount they receive in mortgage loan forgiveness, which makes sense under the ability to pay principle. The other allows homeowners to include mortgage insurance premiums in their mortgage interest deductions. Together, these two provisions are estimated to reduce federal tax revenue by $3.5 billion in 2018.
The remaining 13 provisions are an assortment of incentives for a wide variety of economic interests, ranging from railroads to motorsport complexes to film, television, and live theater. These provisions are expected to reduce federal revenues by $2.5 billion in 2018. Though these provisions are relatively minor, some allow for more favorable depreciation schedules for a range of business activities.
Many of these provisions are narrowly targeted at specific industries and activities, which distort economic activity and will, all in all, cost the federal government an estimated $12.2 billion in 2018. Very few, if any, of the remaining tax extenders seem like must-pass policies. Lawmakers should make permanent any provisions that are genuinely good policy, and let expire any extenders that are not.Share