Extenders and the Opportunity for Tax Reform
November 19, 2014
The Washington Examiner yesterday published an editorial that advanced a rather contrarian idea – that certain tax breaks should be made permanent so that they can be repealed.
If this logic sounds nonsensical to you, good! It is! But that is not because the staff of the Examiner are illogical people. It is because Washington is an illogical place, where nonsense arguments actually hold water.
Here’s how it works: these tax breaks, known as “tax extenders” are a set of policies that are repeatedly “extended” on a temporary basis. They were originally designed to phase back out – often because they were part of temporary bills like the stimulus package – but they haven’t done so yet. They are popular enough that they are hard to eliminate, but they aren’t popular enough for Congress to strongly desire to make them permanent. As a result, they exist in a sort of legislative limbo, never knowing whether they will become a real part of the tax code or not.
So, why pass them to repeal them? Well, many people care a great deal about making tax reform revenue-neutral, and under current scoring of tax reform bills, the “current law” baseline revenue projection excludes these temporary measures. As a result, a tax reform that allows these provisions to expire gets no credit for the revenue gain from doing so.
The Examiner’s thesis is that making these breaks permanent would make it easier for tax reform as a whole to get done, because it could then repeal them and use that repeal to "pay for" better tax breaks. The editorial board fully acknowledges this is a “backward” idea, but (probably rightly) considers extenders to be one of the issues holding up tax reform.
While I am not savvy enough to comment on the specifics of the political process, I would like to add a little bit to the analysis of the tax extenders as actual public policy. The Examiner characterizes many of the extenders as “repugnant carve-outs.” This is undeniably true, but it is also the case that some – but not all – of the tax extenders are genuinely good policy. Particularly, Bonus Depreciation and Section 179 are important for moving the tax code towards proper treatment of new investment.
These should be made permanent and not repealed. Not only are they good policy, but they would be even better policy if they were actually a consistent part of the tax code. It would be easier for businesses to plan new investment if the tax environment for such investment wasn’t constantly being defined on a temporary, ad-hoc basis.