Extenders Are Part of the Long Game in Tax Overhaul

Posted July 16, 2014 at 7:11pm

As the debate over renewing dozens of expiring tax breaks unfolds this year, House Republicans are making an unusual sales pitch: Congress needs to cope with the fact that the grab bag of reductions is much more costly than lawmakers like to admit.

Led by Ways and Means Chairman Dave Camp, GOP lawmakers want to make some of the more than 50 expired tax breaks permanent rather than just extend them for two years, as the Senate would prefer. Such a move would, of course, make the measures counted together significantly more expensive — and emphasizing the costs of tax breaks isn’t a typical GOP tactic. But Republicans have their sights set on a bigger prize, and Camp is playing a longer game in the debate over the so-called extenders. 

By extending all of the cuts permanently, lawmakers and the Congressional Budget Office would have nearly $1 trillion less in future revenue to work with over the next 10 years. Lowering those revenue expectations, or baselines, would increase deficit projections, because the CBO would be counting less tax money to pay for programs. That would leave Congress with a choice of cutting spending or raising taxes to match the projected shortfalls.  

“You constantly see these battles over what’s in the baseline because of the reality that the baseline exerts influence over what the budget debates look like,” said Donald Marron, the former director of the Tax Policy Center.

Camp and his allies argue the breaks have become permanent by default. The Michigan Republican often notes many of the breaks have been extended enough times to meet the 10-year window used when scoring something as “permanent” under congressional budgeting rules.

Getting Senate Democrats to go along will be a tough sell, and many believe Congress will simply extend the extenders yet again in a lame-duck session. In the meantime, the House effort offers Republicans a chance to score some points with the business community ahead of the midterm elections. 

More than 50 so-called extenders expired on Dec. 31. A Senate package that would renew nearly all of the breaks for two years remains stalled. The Senate bill would cost $84.1 billion over 10 years; making all of those breaks permanent would cost more than $930 billion, according to the CBO. 

A permanent extension is a non-starter for most Democrats, even those who support the individual breaks. “It’s one thing to not pay for [it] and do it for a year or two, and it’s another thing to make it permanent and not pay for it,” House Ways and Means ranking Democrat Sander M. Levin of Michigan said last month. 

Democrats on the panel — and the White House, in its veto threats — cited the absence of offsets as a reason for their opposition. Yet they don’t have particular offsets in mind; the Senate plan, with its two-year horizon, also is not paid for. They’re worried that budgeting for permanent tax breaks would be a -multibillion-dollar Trojan horse that could ultimately impose a lower ceiling on spending in future deficit debates and bring down revenue goals for any future tax overhaul.

“The result is less revenue,” said Chuck Marr, director of tax policy at the left-leaning Center on Budget and Policy Priorities. Less revenue, he said, would effectively produce a smaller government.

Conservatives argue that it’s just good bookkeeping, and that tax breaks ultimately lead to more revenue, especially as businesses spend or invest the money they otherwise would shell out to the government. “Only if you believe the static-revenue nonsense” — the idea that cutting taxes necessarily leads to less revenue over the long term — “do you believe that this is going to shrink government,” said Stephen Entin, a senior fellow at the conservative Tax Foundation.

A lower expectation for future tax revenue, Entin said, “does allow the economy to grow out from under the government, as long as you don’t go hog wild on the spending side.” It also “helps them with the future PR for a tax reform,” he added.

Permanence would also achieve a more mundane goal, according to Ken Kies, the managing director of the Federal Policy Group and a former chief of staff of the Joint Committee on Taxation. 

“It also is an attempt to have the baseline reflect reality, because the reality is, based on past history, these things really are permanent,” Kies said. 

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, says the temporary label “sets a precedent.”

“You already have people saying, ‘We shouldn’t pay for them; we haven’t paid for them in the past,’ ” she said. “The thing that strikes me is, the reason that these tax breaks are temporary is because they were never paid for in the first place.”

Camp has shepherded through his committee 14 bills that would make the breaks permanent, actions Democrats call hypocritical. Six months ago, Camp dismissed all talk of extenders, arguing instead for a comprehensive tax overhaul that would eliminate many of the breaks entirely while keeping a few of them essentially intact, with some modifications. Now, rather than getting rid of them, he’s trying to make a passel of those breaks permanent, in the name of certainty and accurate government accounting. 

But critics point to his position on bonus depreciation — which allows companies to deduct half the costs of certain equipment purchases immediately rather than over time — as the biggest political turnaround on extenders.  

“He completely flipped,” Marr said.

Camp did not speak out in favor of extending bonus depreciation — at a cost to the Treasury of $287 billion over 10 years — when his committee marked up the bill in May. But he voted to approve it, alongside every other Republican on the committee, and the House approved it this month. 

Making the extenders permanent, Camp said, is the first step toward overhauling the tax code and broadly lowering tax rates for individuals and businesses.

To Camp and Republicans, lower baselines would make it easier to revamp the entire tax code in a “revenue-neutral” way. With a lower overall revenue target to hit, the overhaul wouldn’t need to incorporate as many tax hikes or fees to offset lowering rates. It was precisely those kinds of offsets — such as a bank tax, or a surtax on the wealthy — that helped doom Camp’s overhaul draft earlier this year.

Camp said in March that one reason he proposed scaling back depreciation measures was to keep the plan revenue-neutral.

Such an overhaul could come much closer to delivering on Camp’s earlier pledge to reduce the top income tax rate to 25 percent, a promise repeatedly supported by Camp’s likely successor on the panel, Republican Rep. Paul D. Ryan of Wisconsin. Ryan’s budget proposal, however, assumed higher revenue levels than if the extenders were made permanent.

More importantly, in their quest for permanent business tax credits, Republicans may be trading away a crucial tool for overhaul negotiations, according to Marr.

“I can see the appeal for conservatives to try to do it. It makes sense for some. But if you’re thinking about how budget agreements could play out, it’s helpful to have the extenders there because they can be paid for, and some would think that’s raising money and others would think that’s neutral. And in politics and policy, the ability to have different interpretations is sometimes very helpful,” Marr said.