The “Tax Expirers”

By :: June 8th, 2012

Today I had the chance to testify before the Select Revenue Measures Subcommittee of the House Ways and Means Committee about a perennial challenge, the “tax extenders,” which really ought to be known as the “tax expirers.” Here are my opening remarks. You can find my full testimony here.

As you know, the United States faces a sharp “fiscal cliff” at yearend when numerous policy changes occur. If all these changes happen, they will reduce the fiscal 2013 deficit by about $500 billion, according to the Congressional Budget Office, before taking into account any negative feedback from a weaker economy. About one-eighth of that “cliff”—$65 billion—comes from the expiring and expired tax cuts that are the focus of today’s hearing.

In deciding their fate, you should consider the larger problems facing our tax system. That system is needlessly complex, economically harmful, and widely perceived as unfair. It’s increasingly unpredictable. And it fails at its most basic task, raising enough money to pay our bills.

The “expirers” often worsen these problems. They create uncertainty, complicate compliance, and cost needed revenue. Some make the tax code less fair, some more fair. Some weaken our economy, while others strengthen it.

Fundamental tax reform would, of course, be the best way to address these concerns. But such reform isn’t likely soon.

So you must again grapple with “the expirers.” As a starting point, let me note that they come in three flavors:

  1.  Tax cuts enacted to address a temporary challenge such as recession, the housing meltdown, or regional disasters.
  2. Tax cuts that have reached a sunset review. Prolonged economic weakness and recent omnibus extensions mean there aren’t that many of these, but they do exist.
  3. Tax cuts that expire to game budget rules. These appear to be the most common. Supporters intend these provisions to be long-lived or permanent, but they haven’t found the budget resources to do so.

To determine which of these policies should be extended and which not, you should consider several factors:

  • Does the provision address a compelling need for government intervention?
  • Does it accomplish its goal effectively and at reasonable cost?
  • Does it make the tax code more or less fair?
  • Do its potential benefits justify the revenue loss or the need for higher taxes elsewhere?

In short, you should subject these provisions to the same standards applied to other policy choices. And in this case, you should keep in mind that most of the so-called “tax extenders” are effectively spending through the tax code. You should thus hold them to the same standards as equivalent spending programs.

You should also reform the way you review expiring tax provisions.

  1. Flip the burden of proof. Today’s standing presumption is that most of these provisions will ultimately be extended. That’s why they are called “the extenders,” even after they have expired. Ultimately, though, we should move to a system in which the presumption, rebuttable to be sure, is that expiring provisions will expire unless supporters can justify their continuation. In short, they should be “the expirers.”
  2. Second, divide them up. Like musk oxen, the beneficiaries of these provisions have realized that there is safety in numbers. They thus do their best to coalesce as a single herd—“the extenders”—and to migrate across the annual legislative tundra with as little individual attention as possible.You should break up the herd. Reviewing each provision in detail may not be practical in a single year, but you can identify specific groups for careful review. For example, you can separate out the stimulus provisions, the charity provisions, the energy provisions, and so on.

    You should also spread scheduled expirations out over time. If fewer expire each year, you will be able to give each one more attention.

  3. Third, change budget rules for temporary tax cuts. Pay-as-you-go budgeting creates crucial discipline but has an unfortunate side effect: long-term tax policies often get chopped into one-year segments. In addition, 10 years of offsets can be used to pay for a single-year extension.To combat this, you could require that any temporary tax provision be assumed to last no less than five years in the official budget baseline. Proponents would then have to round up enough budget offsets to pay for those five years.

    In addition, Congress could require that offsets happen over the same years as an extension. That would eliminate situations in which 10 years of offsets pay for a single-year extension.

4Comments

  1. Michael Bindner  ::  11:13 pm on June 8th, 2012:

    I actually prefer comprehensive tax reform. I will post my comments for the record below.

  2. Michael Bindner  ::  11:15 pm on June 8th, 2012:

    Comments for the Record

    House Committee on Ways and Means

    Subcommittee on Select Revenue Measures

    Hearing on Framework for Evaluating Certain Expiring Tax Provisions

    Friday, June 8, 2012, 9:30 AM

    By Michael G. Bindner

    Center for Fiscal Equity

    Chairman Tiberi and Ranking Member Neal, thank you for the opportunity to submit these comments for the record to the House Ways and Means Committee Subcommittee on Select Revenue Measures.

    As always, our comments are in the context of our proposed comprehensive tax reform. As you know, the Center for Fiscal Equity proposal includes four major provisions:

    ■A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure that every American family pays something.
    ■Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25% in either 5% or 10% increments. Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt.
    ■Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
    ■A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support, health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.
    While the call for comments excludes transportation trust fund taxes from the mix of taxes considered under these comments, we find that our analysis of such taxes provides a very useful criterion in judging the appropriateness of targeted taxes. In our testimony on the issue of energy (and by definition, transportation) tax issues, we laid out the principle that if the tax provision led to a general increase in a broad based tax paid by employers in other industries, then the tax break was inappropriate.

    For example, if energy companies received a credit that was applicable to them, rather than to all businesses, then it would be wrong to maintain such a credit. If, on the other hand, all firms could utilize the same credit in principle, then it should be allowed. This is true in both a corporate income tax system and the more general VAT-like Net Business Receipts Tax we suggest as part of our comprehensive plan for tax reform.

    To the extent to which tax reform eliminates a specific tax and the related subsidy and replaces it with reforms such as the Net Business Receipts Tax (which taxes both labor and profit), tax extenders are problematic, but not impossible to preserve.

    This is one of the virtues of a separate Net Business Receipts Tax, rather than replacing the Corporate Income Tax with a VAT or a Fair Tax – which by their nature have no offsetting tax expenditures. The challenge arises, however, when the existence of tax subsidies carry with them the very justified impression that less well connected industries must pay higher taxes in order to preserve these tax subsidies. Worse is the perception, which would arise with their use in a business receipts tax, that such subsidies effectively result in lower wages across the economy. Such a perception, which has some basis in reality, would be certain death for any subsidy.

    One must look deeper into the nature of these activities to determine whether a subsidy is justified, or even possible. If subsidized activities are purchased from another firm, the nature of both a VAT and an NBRT alleviate the need for any subsidy at all, because the VAT paid implicit in the fees for research and exploration would simply be passed through to the next level on the supply chain and would be considered outside expenditures for NBRT calculation and therefore not taxable. If research and exploration is conducted in house, then the labor component of these activities would be taxed under both the VAT and the NBRT, as they are currently taxed under personal income and payroll taxes now.

    The only real issue is whether the profits or losses from these activities receive special tax treatment. Because profit and loss are not separately calculated under such taxes, which are essentially consumption taxes, the answer must be no. The ability to socialize losses and privatize profits through the NBRT would cease to exist with the tax it is replacing.

    Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.

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