Expert’s take: Tax extenders debate
The Senate is set to make Finance Committee Chairman Ron Wyden’s tax-extenders legislation its top priority this month. But what is this all about, and how does it affect the average American? Alex Brill, research fellow at the American Enterprise Institute (AEI), sets us straight:
Concerning the tax extenders legislation that is being debated in Congress, what exactly is the debate concerning? What are the opposing views?
While the fundamental structure of the federal tax system is permanent law, there are roughly four dozen temporary tax provisions that expired at the end of 2012. These tax breaks are commonly referred to as “tax extenders” because Congress regularly (and often retroactively) extends them for a year or two. These provisions affect a disparate set of activities and items ranging from basic research and development to mine safety equipment and teachers’ classroom expenses.
Congress not only regularly debates how and when to renew these tax credits, deductions, and exclusions, but also regularly expands the list. The nonpartisan Joint Committee on Taxation tracks the number of expiring tax provisions and reports that the number tripled from 50 in 1998 to 152 in 2012.
Some policymakers advocate for another simple extension of these tax breaks on the grounds that most or all serve a range of laudable policy objectives. But increasingly, lawmakers have begun to argue that pursuing social and industrial policy is not the purpose of the tax system, and that more narrow tax breaks erode the tax base and lead to a more distorted, less functional tax system.
What does each side (the Senate and the House) propose, and what are the advantages and disadvantages of each?
The Senate Finance Committee has generally proposed a two-year extension (2014 and 2015) of the tax extenders that expired last December. The House Ways and Means Committee has taken a different approach and has focused on making certain expiring tax provisions permanent law. Most recently, the full House voted to make permanent the R&D tax credit. The White House has threatened to veto this legislation.
In testimony before the House Ways and Means Committee in 2012, I offered the following framework for evaluating these policies: “The first question is whether the extender is intended to serve a valid policy goal, such as promoting economic growth or tax fairness. The second question is whether the extender would be effective at achieving its intended goal if it were permanent. Extenders that meet these criteria should be made permanent and the others should expire.” In short, it is time to end blanket extensions of these breaks. Those that are rational and effective should be made permanent.
How does this debate affect the average American citizen?
Only a few tax extenders are likely to have a direct impact on individual taxpayers. One expiring provision allows for the deduction of state sales tax payments in lieu of deducting state income taxes; this tax break is of particular interest to taxpayers in Texas, Florida, and other states without a state income tax. For homeowners who pay mortgage interest insurance, an allowable deduction for those costs has expired but stands to be reinstated. A handful of tax breaks related to energy conservation and energy efficiency such as a tax credit for the purchase of an electric motorcycle are on the list as well. But, that’s not to say that this debate is irrelevant to most citizens. If Congress continues to extend this laundry list of narrow tax breaks and avoid the more difficult task of pursuing an overhaul of the tax code, the code will remain in its current form: complex, distortionary, arbitrary, and unfair. How Congress deals with these policies will serve as a clear signal of its willingness to tackle the broader task of tax reform.