Lawmakers are now focusing on extending a series of tax provisions mainly benefiting businesses for one year after a much larger deal that would have added hundreds of billions of dollars to the deficit collapsed last week.
Lawmakers are now focusing on extending a series of tax provisions mainly benefiting businesses for one year after a much larger deal that would have added hundreds of billions of dollars to the deficit collapsed last week.
Initially, lawmakers were considering making a few temporary provisions permanent while extending most other provisions through 2015 — without offsetting a single dollar of lost revenue. If Congress were to pass legislation resembling that deal, it would have added roughly $530 billion to the deficit over 10 years.
These provisions — collectively known as “tax extenders” — are temporary measures that, like other tax expenditures, essentially subsidize certain special interests or activities. Making them permanent, or even just extending them again without offsetting the lost revenue, would be fiscally irresponsible. Any tax provision that decreases revenue should be offset by eliminating other provisions in the tax code or cutting spending. Unfortunately, neither the House nor the Senate seem to be concerned with finding offsets, even though offsets are required under pay-as-you-go (PAYGO) rules.
The good news is that the initial deal appeared to hit a roadblock after the White House threatened to veto it. While public statements by administration officials suggest this action was partially taken out of concern for the deficit, they mostly pointed to the fact that the deal omitted extensions of their preferred tax provisions. This line of thinking is inherently problematic because the solution to fiscal irresponsibility should not be more fiscal irresponsibility. Instead of offering suggestions for even more extensions, the administration should have demanded that all provisions being considered do not add to the deficit.
If Congress and the President chose to make tax provisions permanent without offsetting the cost, it would soon threaten progressive and conservative priorities alike. Conservatives would no longer be able to count on the current level of revenues, which would make it even harder to achieve their stated goal of balancing the budget without explicit tax increases. At the same time, progressive lawmakers would enter any future tax reform negotiations with a lower baseline for federal revenue — likely necessitating even deeper spending cuts that they might hope to avoid.
The revenues that would be collected by allowing all of the extenders to expire is already counted in the CBO baseline, which is based on current law. Thus, passage of any extenders legislation without offsets would add to projected deficits. That would be bad but it would at least allow lawmakers to revisit their work again in short order. Legislation that makes some of these provisions permanent without offsets is even more egregious because it would lock in the revenue loss from inefficient subsidies of dubious merit.
Congress has been wavering between a bad deal and a terrible one — a particularly sad situation when we remember that lawmakers were making significant progress on deficit reduction a few years ago. If they truly believe that these tax provisions are important enough to pass, they should consider them important enough to pay for as well. Furthermore, legislation on the extenders should ideally begin moving us toward a comprehensive reform of the tax code that would eliminate inefficiencies and better promote economic growth. That would be a bipartisan win far greater than a terrible deal that simply worsens the deficit.
