In the Battle for Tax Extenders, "It's Complicated"

Just a few days ago, GOP Members of the Senate voted to block the EXPIRE Act, offered as a substitute amendment to  H.R. 3474, over Senate Majority Leader Harry Reid’s (D-NV) repeated refusal to consider amendments to the legislation. The same problem shut down debate of the Portman-Shaheen energy efficiency legislation last week. 

Even before Reid once again hijacked the Senate’s normal order, the EXPIRE Act’s future was anything but certain. The bill comprised a two-year extension of 55 tax credits, deductions, and other tax policies, most of which recently expired at the end of 2013. These tax provisions, often referred to as “extenders,” are a complex issue to discuss. Not surprisingly, those within the conservative movement have a variety of perspectives on this matter, centering on the true nature of a tax credit, what constitutes a “good” or “bad” tax extender, and whether or not the bill’s broad-based, pro-growth provisions outweigh its less beneficial elements .

These differences of opinion were evident earlier last week with Club for Growth and Heritage Action holding one view and Americans for Tax Reform (ATR) another.  That these venerable free-market institutions – who agree on many other issues – should come to such different conclusions is a good illustration of just how much remains to be sorted out among people of good will.

The Club for Growth and Heritage Action’s vote alerts focused on the fact that the EXPIRE Act is packed with tax provisions that benefit only a narrow part of the economy, distort markets, and prop up otherwise unprofitable industries, such as the notorious Wind Production Tax credit. Heritage explained:

The Senate’s tax extenders — and indeed the entire process surrounding the extension of expiring tax provisions — is one of the most egregious examples of Washington using its powers to prop up well connected interests.

For example, the Senate package includes over a dozen targeted tax provisions aimed at energy production, most of which are geared toward so-called green energy.  According to the Heritage Foundation, Congress designed many of the provisions to “artificially tilt the energy market in    the direction of certain renewable sources or reward certain taxpayers for behaving how the government would like them to.”  Others are “narrowly tailored so only certain industries can    benefit, which is unfair.”

In light of preferential tax policies directed toward likes of NASCAR and horse racing, it’s easy to see why taxpayers should be outraged at such an obvious manipulation of the tax code on behalf of favored industries. At the same time, as ATR’s supportive vote alert  argued:

Some tax provisions should not return – the wind production tax credit springs to mind, but there are a number of others. However, these are more than balanced out by extremely important tax relief provisions which must not be lost from the code.

The vote alert went to great lengths to differentiate between good and bad provisions, highlighting the fact that “many conservatives have been deeply confused on this distinction,” before finally warning that “the mandate for the Senate is clear: do no harm.”

The Tax Foundation  did not take a position on the EXPIRE Act, but it added further nuances to the debate as it carefully laid out the case for good and bad tax extenders in this article:

Often, Congress keeps all of the extenders – which includes a whole slew of tax breaks for individuals and businesses – but they shouldn’t. Many of the 55 expired provisions are economically distortive, encouraging some economic activities over others. In fact, there are only a small few that should be kept in order to make the tax code more neutral by mitigating the tax code’s biases against savings and investment.

And here the Tax Foundation delineated the “cost” of each provision, bringing to light to another major complicating factor in the tax extenders fight.  While some repeatedly reference the “cost” of a particular tax credit, others argued that these provisions are effectively already on the books and thus, did not reduce anticipated tax revenue. Due to the perceived “cost” of the tax credits, the EXPIRE Act also contained other revenue raisers to “offset” the extenders. The Heritage Foundation did a good job of explaining the problem:

… the Congressional Budget Office incorrectly scores an extension of previously-enacted tax cuts as if they were wholly new tax cuts. Under budgeting rules it follows, this means Congress must cut spending or raise other taxes to avoid “adding” to the deficit.

But reviving once again a repeatedly-extended tax policy is not a tax cut. These policies have been in place for years, some — such as the Research and Experimentation (R&E) Credit — for three decades. If they expire, taxes will rise on those taxpayers who use them. Extending them merely prevents a tax increase, so there is no need to offset their “cost.”

While it will be hard to ever completely reconcile these very thoughtful perspectives, what all free market advocates can agree on is the need for fundamental, comprehensive tax reform, in particular a lower corporate tax rate.

Despite earnest attempts to jump-start such a discussion, that day is still a long way off. However, in the meantime, the House has taken a good approach toward the extenders problem by bringing the provisions up in a piecemeal fashion that will allow them to pass or fail based on their specific merits. Such was the case earlier this month with a bill to make permanent the research and development tax credit that NTU supported here. This also avoids the log-rolling of the Senate’s EXPIRE Act package while keeping some of the more voracious special interests at bay.

The best prospect for taxpayers to emerge from this extenders fight with a win is to urge the House to stay the course and when it comes up again, encourage your Senators to insist on good amendments to the EXPIRE Act that would remove some of its narrowly tailored and economically dubious tax provisions with an eye toward across-the-board rate reductions. Still, one thing is for certain: without real reforms to make good policies permanent, we’ll be haggling over the minutiae of tax extenders again soon.