Tax Extenders and Fiscal Restraint

By :: May 22nd, 2008

It was good to hear from University of Virginia tax professor and former Joint Tax Committee boss George Yin. George argues that temporary tax cuts are a good idea because they force Congress to consider the costs and benefits of these measures before renewing them. This reckoning, he says, imposes more political accountability on the system, not less.

I’m not sold. George describes the system as it should be. But unfortunately, once down the Washington rabbit hole, nothing is what is seems.

The problem is that no one bothers to consider the economic costs and benefits of extending individual temporary tax cuts. Instead, they are considered as a single, log-rolling whole. A pol from New York will back an endlessly-extended ethanol credit, no questions asked, as long as his colleague from Iowa looks the other way at continuing tax incentives for developing Manhattan real estate.

Temporary tax breaks might be a good idea if Congress had to pay to extend them. Rules to offset tax cuts with tax hikes, known as pay-as-you-go (or paygo) were adopted in the 1990s, abandoned after 2001, and restored, at least on paper, when the Democrats regained control of Congress in 2006. But even now, they are often ignored.

This year’s House extenders bill would pay for $55 billion in renewed tax breaks, but those offsetting tax increases are likely to die in the Senate. Similarly, Alternative Minimum Tax relief is extended annually without ever being paid for.

George also raises an important, but technical, budget scoring argument. When it passes a permanent law, Congress sees a snapshot estimate of what that proposal is expected to cost over the next five or 10 years, and it never needs to revisit those costs. If a law is temporary, Congress must confront updated cost estimates each time it extends the measure.

On this, George is absolutely right. But even in a paygo world, I don’t see how budget scoring makes a temporary tax cut any more likely to be repealed than a permanent one. Either way, all the political pressures favor keeping existing tax breaks on the books, whether they are due to sunset or not.

John McCain argues that it is foolish to assume the "temporary" Bush tax cuts will ever expire. Thus, he insists, merely extending them should add nothing to the deficit. For him, temporary tax cuts were little more than political convenience. I wish Yin were right, but I’m afraid McCain’s view is closer to the truth, Washington-style.