Making the Stimulus Tax Cuts Permanent Would Cost $1.7 Trillion
Many of the tax cuts in the stimulus bill President Obama signed today are built on the legislative fantasy that they will expire after a year or two.
The reality is that Congress and Obama are likely to continue these tax breaks long after the economy recovers. And the price of doing so will be staggering: Making just four of the most popular individual tax cuts in the bill permanent would reduce federal revenues by more than $1.7 trillion from 2010 through 2019. They'd be more than three times more generous than the bill’s spending initiatives, which are expected to cost a mere $500 billion.
I asked TPC’s Rachel Johnson to run through The Big Computer the cost of extending four key tax cuts through 2019—expansions of the earned income credit and the child credit, Obama’s signature Making Work Pay credit, and Alternative Minimum Tax relief. The political pressure to continue these four will be enormous. Obama has already called the Making Work Pay credit a down payment on permanent tax relief for those making $200,000 or less. It is hard to imagine that a Democratic Congress would roll back increases in the EITC or the child credit—two key benefit programs for low-income working families. And, as we all know, protecting tens of millions of upper middle-class taxpayers from the AMT is as much an annual Washington event as the flowering of the cherry blossoms.
Together, extending these tax breaks through the next decade will reduce federal revenues by $1.7 trillion. AMT relief will cost nearly $790 billion, Making Work Pay $640 billion, the Child Credit $200 billion, and the EITC $70 billion.
TPC did not estimate the cost of continuing other provisions. But I would not be surprised to see many of the business tax breaks, including the energy tax subsidies, the tax-exempt bond provisions, and faster write-offs for small business capital investment also become permanent fixtures of the Tax Code. Same with the new American Opportunity Tax Credit for college students—another Obama campaign pledge. Together, they would add tens of billions more to the price tag. In round numbers, extending those stimulus tax breaks most likely to be kept alive would reduce federal revenues by $2 trillion below what current law would yield.
This long-run revenue drain would dwarf the new spending in the stimulus measure. After all, in the face of huge deficits, spending is likely to be scaled back. Besides, you can build a highway interchange only once. But the tax cuts are the gifts that keep on giving, as we have seen with the dozens of tax extenders that have come to stick to the Tax Code like Velcro over the past decade.
In the campaign, Obama promised to cut tax revenues by nearly $3 trillion over the next decade. To put it another way, he said he would slash revenues from roughly 20 percent of Gross Domestic Product to just 18 percent by 2018, No one who listened to that pledge should have been surprised by the tax cuts in this bill. However, expected or not, they will place immense pressure on Obama and Congress to cut other spending or raise other taxes. And, given the challenges the new president faced when he tried to do the easy work of increasing spending and cutting taxes by nearly $1 trillion, he is digging himself—and the country—an exceedingly deep fiscal hole.