Tax Extenders and Tax Reform

On Tuesday, I testified before the Senate Finance Committee at a hearing titled “Extenders and Tax Reform: Seeking Long-Term Solutions.” I was already depressed about the state of our tax system before I started preparing. As I drafted my testimony, I became distraught.

Our tax system is a mess and unless we send a clear signal to Congress to do something about it, it’s just going to get messier and messier. As Bruce Bartlett writes in his book, The Benefit and The Burden, the tax system is like a garden. It gets overgrown and chaotic unless you regularly clean it. Well, we’ve got an eyesore now and need to bring in a bulldozer.

Here’s what leaves me distraught.

Sixty temporary tax provisions expired at the end of 2011. Congress enacted each with an expiration date and has subsequently extended almost every one. Most of these “temporary” provisions—nicknamed “extenders”—have been repeatedly extended.

Congress created the vast majority of extenders to provide special treatment for a particular activity or investment. They vary widely from special depreciation rules for NASCAR race tracks to subsidies for commuting. Unlike other tax provisions that provide targeted tax benefits, however, extenders have a limited shelf life. Much like the dairy section of the grocery store, our tax code is now littered with expiration dates.

For many taxpayers whom these extenders affect, the recurring ritual of enduring a tax code death watch only to be saved by last minute clemency — or, in cases like this year, resurrection — creates tremendous volatility and uncertainty. It creates a perception that our tax code is unfair and reinforces the view that the current legislative process is dysfunctional and our elected representatives are unwilling or unable to choose among competing priorities.

It’s time to take a stand on extenders and on tax reform. I recommended at the hearing that the extenders be considered within the context of fundamental tax reform.

We seem to have forgotten that the fundamental purpose of our tax system is to raise revenue to fund government. The current system is riddled with tax provisions that favor one activity over another or provide targeted tax benefits to a limited number of taxpayers. Whether permanent or temporary, these provisions create complexity, impose enormous compliance costs, breed perceptions of unfairness, create opportunities to manipulate rules to avoid tax, and lead to an inefficient use of our economic resources. The tax code has become less stable, increasingly unpredictable, and more and more difficult for taxpayers to understand.

A reform that broadens the base would not only raise revenue but would also simplify the system, increase transparency, make it less distortive by reducing tax-induced biases towards certain activity, and improve the fairness of the system. Broadening the base requires deciding which special tax provisions to keep in the code and how best to design them.

Our current fiscal situation demands that we refrain from our habit of kicking the can down the road on tax reform and face the challenges ahead. It’s time to bring in that bulldozer.