Temporary Laws and Fiscal Restraint
Howard Gleckman continues to think that temporary tax cuts are no better than permanent ones from the standpoint of enhancing political accountability and fiscal restraint (“Tax Extenders and Fiscal Restraint,” May 22, 2008). So here’s some data. Spending on discretionary programs (both defense and non-defense), which are like temporary tax cuts in that funding for the programs must be renewed by Congress essentially every year, declined as a percentage of GDP from 12.7 to 7.6 percent between 1962 and 2007. During the same period, spending on “mandatory” programs, which (like permanent tax cuts) do not need to be renewed every year but simply continue automatically, more than doubled as a percentage of GDP from 4.9 to 10.6 percent. Although harder to quantify, there is evidence that spending through tax expenditures, that is, special provisions in the tax law such as exclusions, deductions, and credits, increased at a rate comparable to mandatory spending and much faster than discretionary spending. Like mandatory spending, most tax expenditures are “permanent” and do not require periodic renewal.
Here’s a thought-experiment: imagine what would happen if all tax expenditures had to be renewed every year in order to be continued. This would immediately create potential tension between existing tax programs (and their supporters) and new programs (and their supporters). But it would be worse than that. The supporters of some existing programs would insist upon an increased allocation of funds. For example, due to rising health care costs, the tax allowance for employer health insurance premiums would need more money. Perhaps because of increasing participation, the earned income tax credit program would also need more money. When housing values begin rising again, the mortgage interest and property tax deductions would also need increased funding. And so forth. My guess is that the total amount Congress could spend on all of these programs would never be enough and that one way or another, some constraint greater than what we see today would be imposed.
Finally, Howard applauds the fact that the Ways & Means Committee’s tax extender bill is paid for (although he expects the Senate to drop the “tax increases”). But let’s take a look at that bill. Over half of the Committee’s proposed “tax increases” is attributable to one item—a delay for ten years (until 2019) in a tax reduction (worldwide allocation of interest) scheduled to take initial effect next year. This tax reduction was added in 2004 and because its initial effect was deferred until 2009, it was projected to cost only about $14 billion. A ten-year delay of this change, however, is estimated to raise about $30 billion in revenue. In other words, even though the law remains exactly as it was prior to 2004 and may never be changed, the net effect of the 2004 enactment and 2008 proposed delay is to “raise revenues” by $16 billion, money that is then used to pay for the tax extenders. And this trick can be continued indefinitely. For example, in 2018, Congress can delay the provision for another 10 years and “raise” another $30 billion (or more) to pay for some other tax goodies.
The culprit is that the original tax reduction enacted in 2004 was a “permanent” provision. By being permanent, it forever changed the state of the law even though Congress did not take responsibility for the full cost of that change. Just another reason to hope that tax cuts, if they are made, are temporary rather than permanent.