The U.S. House of Representatives is fast approaching a vote on a one-year continuation of the “tax extenders” package as of this writing. The wide expectation is that the Senate will soon follow suit, and President Obama will sign into law whatever is sent to him. What should conservatives think about this development, and, more important, what should conservatives support on tax extenders going forward?
First, what exactly are tax extenders? Simply put, it’s a collection of some 55 tax-relief provisions that expired on December 31, 2013 (as they have many times before). All Congress is doing this week is extending that expiration deadline to December 31, 2014. After the New Year, these tax-relief provisions will again be expired. Congress will have all of 2015 to work on re-upping these extenders, since no one will file taxes for 2015 until the spring of 2016. That’s why these things tend to happen at the last minute in December lame-duck sessions.
Since this emergency action on extenders looks like a done deal, the more interesting question is where conservatives should be on this whole mess. Some say that the inclusion of corporate crony extenders (especially the wind-production tax credit, or wind PTC) means that the entire package should simply die. Others say the package should die so that Congress is forced to focus on fundamental tax reform. Still others — like my organization, Americans for Tax Reform — are for a yes/and strategy: yes, do the extenders package; yes, try to make some of them permanent; yes, do fundamental tax reform next year.
I would submit that the most important consideration for conservatives here is the fundamental question of the federal government’s overall tax burden on families and employers. According to the Congressional Budget Office, simply letting the extenders permanently expire will result in federal tax revenues trending at about 18.1 percent of economic output by the end of the decade. However, if tax extenders were all made permanent, the federal tax grab from the economy would be more like 17.8 percent of economic output, a difference of 0.3 percentage points.
That may not sound like much, but 0.3 percentage points is a lot of money. In today’s dollars, it’s about a $50 billion per year difference. Conservatives should, all other things being equal, be against the federal government’s taking $50 billion more a year from taxpayers. It’s always and everywhere a good thing when less money is coming into the federal coffers.
A related point has to do with fundamental tax reform. Incoming House Ways and Means Committee chairman Paul Ryan has said he would prefer to do tax reform with the lower revenue target. That’s because the lower revenue target means $50 billion of revenue he doesn’t have to come up with to pay for the tax-rate reductions and other pro-growth tax changes he wants to do in tax reform.
The big picture: A lower tax-revenue baseline is good for restraining government, good for liberty, and good for the prospects of tax reform. What about the makeup of the extenders package?
To hear some people describe it, the tax-extenders package is the wind PTC and a few other minor items of note. In fact, the largest components of the package are down payments on full business expensing.
Under “50 percent bonus depreciation,” companies can write off half the cost of new business investment immediately, while subjecting the rest to multi-year depreciation deductions. A related provision (small-business expensing or “179 expensing”) would allow smaller firms to write off the whole cost of new business investment up to $500,000 per year.
Bonus depreciation and small-business expensing alone represent $57 billion of first-year tax relief, or fully 70 percent of the first-year cost of the extenders package. There are other cost-recovery provisions in the form of a research-and-experimentation credit and accelerated depreciation for restaurants, Indian reservations, leasehold improvements, etc.
These are not bugs that need fixing. Rather, these cost-recovery tax extenders are meaningful steps in the right direction. All conservative tax thinkers agree that businesses in a reformed tax code should be able to fully expense all business charges immediately. This cash-flow treatment of business expenses is fundamental to a consumption-tax base. You’re for this if you’re a supporter of the FairTax, the flat tax, or any other consumption-tax-base plan.
To cavalierly say “Scrap all those things — let’s move in the opposite direction and lengthen cost-recovery lives via complex depreciation and amortization tables” is, put bluntly, pure folly. It’s as if someone hitchhiking from New York to Los Angeles turns his nose up at a ride to Chicago. That man is never going to get to his goal.
Conservatives ought to recognize that much of the tax relief in the extenders package is in service to a fundamental tax-reform goal, namely, full business expensing. Most of the rest are important tax-hike-avoidance measures for families: being able to deduct state sales tax, not having to pay taxes on forgiven mortgage debt in the event of a foreclosure, being able to deduct tuition and teacher classroom expenses, contributions directly from an IRA to a church or other charity. Very little of the dollar value of the package is devoted to the admittedly crony-capitalist wind PTC.
Next Congress, we should have an opportunity to make many of these good provisions permanent. A deal to do so was in place just before Thanksgiving, but it was blown up by President Obama’s veto threat. He would like to see some refundable tax credits (that is, you get them even if you have no income-tax liability) that are set to expire in a couple of years made permanent as part of the deal. We should take that deal for two reasons: First, when those refundable credits are about to expire, they will almost certainly be extended anyway; second, they are a small price to pay for permanent tax relief for the American people and a down payment on fundamental tax reform.
Conservatives need to step back. The inclusion of one crony-capitalist tax break for wind production should not mean losing one’s head on the bigger fight for lower taxes and fundamental tax reform. Nor should it be any problem to make refundable tax credits — which would be extended in any event — permanent. Republicans shouldn’t be shy: Backing extenders is the smart move.
— Ryan Ellis is policy director of Americans for Tax Reform.