Howard Gleckman is a Resident Fellow at the Urban Institute and editor of TaxVox. He is author of “Caring for Our Parents,” (St. Martin’s Press), a book on how we deliver and finance long-term care to seniors and adults with disabilities. He was formerly senior correspondent in the Washington bureau of Business Week, a Media Fellow at the Kaiser Family Foundation, and a Visiting Fellow at the Center for Retirement Research at Boston College.
Buried deep in House Ways & Means Committee Chair Dave Camp’s tax reform plan is a proposal to require donor-advised funds to distribute contributions within five years. The proposal would be a major change for these charitable vehicles, where funds currently can sit indefinitely.
Donor-advised funds (DAFs) are an easy, low-cost way for people (who tend to be upper middle-class but not super-rich) to both shelter income and give to their favorite charities. And they have been booming. In 2012, according to the National Philanthropic Trust, these funds held more than $45 billion—nearly as much as the Gates and Ford foundations combined. Contributions were up by one-third over 2011. Think of them as mini private foundations for the merely wealthy, though middle-class people can certainly participate.
They work like this: You set up a fund with a broker or mutual fund company, or with a non-profit community foundation. Each year you can instruct the fund to distribute a portion of your contribution to your favorite charity. However, you can immediately deduct your contributions even before they are distributed.
As with other charitable gifts, you can avoid paying capital gains taxes by contributing appreciated stock or other property to the fund. And you get an extra benefit: You can transfer a single large piece of appreciated property (say, a rental house) to the DAF and then sell it and give the proceeds to many different charities without having to pay capital gains taxes.
Unlike private foundations, DAFs have no minimum distribution rules. Your contributions can sit with your broker or community foundation in perpetuity and never have to be distributed to charities. The managers of the funds collect annual fees for holding and distributing the money.
Camp would require funds to pay out contributions within five years of receipt. Undistributed assets would be hit with a stiff 20 percent excise tax.
Are these funds a tax shelter or an effective tool to encourage well-off (but not rich) Americans to contribute more to charity? The answer may be both.
Supporters note that annual payouts from DAFs average about 16 percent, more than three times the minimum 5 percent distributions required of private foundations (which tend to treat that target as a ceiling as well as a floor). They note that there are no set-up fees and that annual management fees are relatively low (1.1 percent for community foundations and about 0.6 percent or less for brokers—plus investment expenses). Minimum contributions are usually about $5,000.
Their big argument is that these funds can democratize endowed giving by making a private foundation-like mechanism available to middle-income people. This allows them to smooth their giving by contributing relatively large amounts to their DAF in fat years and smaller amounts in thin ones, and in fact increases charitable contributions overall.
The Manhattan Institute’s Howard Husock made a nice case for the funds in a March 28 piece on Forbes.com: “Donor-advised funds, because of their scale and potential for substantial growth, may provide a new model for addressing America’s social needs.”
But critics don’t buy it. Boston College law professor Ray Madoff calls DAFs “charitable checking accounts.” In a January article in the Journal of Philanthropy, she wrote, “…donors and the people who manage their money have been the primary recipients of benefits from the growth of donor-advised funds, while charities and the people they serve are being starved of resources.”
She argues that despite the growing popularity of DAFs, there has been no increase in charitable giving. In fact, she says the ability of people to shelter income by shifting assets to DAFs rather than giving directly to charities may even have reduced contributions to charities themselves.
While I have some sympathy for Husock’s argument, his democratization claim has limits. We don’t know much about the incomes of people who set up DAFs but we do know each fund holds an average of about $225,000.
Thus, DAFs do make it possible for many more people to set up charitable funds, but the biggest tax beneficiaries are still quite likely to be high-income households.
Some form of minimum payout rule seems to make sense though there is nothing magic about Camp’s five years. However, my Tax Policy Center colleague Gene Steuerle asks another question: If policymakers are so worried about sheltering, why impose a five-year distribution rule only on DAFs and not on private foundations as well? If the goal is to make sure funds end up the in hands of charities, why stop with DAFs?
Egged on by business lobbyists, congressional tax writers seem increasingly interested in allowing firms to rapidly write off the cost of their capital investments. Especially in the House, lawmakers would allow small businesses to expense the full cost of their investments in the year they are acquired, and let larger firms heavily front-load tax depreciation for their capital purchases.
There is some logic to this idea. Expensing is a key element of a business consumption tax, for instance. But in a well-designed consumption levy, expensing comes with an important trade-off: Firms lose their ability to deduct interest costs associated with those purchases.
Unsurprisingly, none of the supporters of expensing or rapid depreciation has suggested this. But they should.
The reason for the trade-off is simple. When a firm can expense its capital costs, the tax rate on that investment is zero. If the business can also deduct interest, it is paying a negative tax on that equipment—effectively receiving an investment subsidy from the government. Here’s a nice Tax Notes essay from a few years back by Cleveland State law professor Deborah Geier that explains what’s going on.
Despite this problem, supporters of very generous tax treatment for capital investment are steaming ahead. Two key depreciation provisions expired at the end of the last year (two of the dozens of so-called extenders). And many lawmakers would bring them back to life.
Senate Finance Committee Chair Ron Wyden (D-OR) would restore through 2015 a measure that would allow small business to expense up to $500,000 in equipment (phasing out for investments of up to $2 million) and a second provision called bonus depreciation that would let all firms write-off their investment costs faster than usual.
In the House, senior Ways & Means Committee member Pat Tiberi (R-OH) along with Democrat Ron Kind (D-WI) have proposed making the small business provision permanent. Extending these two ideas for 10 years would add nearly $350 billion to the deficit over the decade.
Interestingly, panel chairman Dave Camp (R-MI) has gone in a very different direction in his tax reform plan and would repeal accelerated depreciation. But while his reform is going nowhere, Camp has begun an exercise to determine which of the expired provisions should be made permanent and which would be allowed to die. He’s been noncommittal when asked about Tiberi’s bill.
The bonus depreciation provision has been in and out of the tax code for more than a decade. In 2008 it was made especially generous as part of the big anti-recession stimulus bill and it was extended in 2010. Though businesses are currently awash in cash, many are pushing hard to make the generous depreciation rules permanent or, at the very least, bring them back for a few more years.
By some estimates, these provisions are worth in excess of $70 billion-a-year in increased up-front cash flow for the S&P 500 alone. Of course, they’ll eventually have to pay it back but firms nearly always want the cash now rather than later (especially when it comes in the form of an interest-free loan from the government). And when interest rates rise, the subsidy will be even more valuable. It is no wonder K Street is pushing so hard to restore the rules.
But combining expensing or even very generous multi-year depreciation with an interest deduction allows firms to exploit tax preferences with borrowed money. It creates a classic tax arbitrage. If expensing and bonus depreciation are going to be made permanent, Congress should limit the interest expense deduction too.
It isn’t news that congressional Democrats and Republicans have agreed to spend the time between now and the November elections messaging, rather than legislating. When it comes to domestic policy it has only two real issues on its must-do list: Deciding the fate of 50+ tax breaks that expired last December and figuring out what to do about the Highway Trust Fund which is, not to put too fine a point on it, nearly broke.
The expired provisions have gotten most of the attention in recent weeks, but funding for roads, bridges and mass transit faces a more serious problem. The Congressional Budget Office estimates that the trust fund will run out of money within the next few months and projects it may be unable to pay all of its bills after July. This is how CBO put it on February 4:
Under CBO’s baseline projections, the highway and transit accounts of the Highway Trust Fund will have insufficient revenues to meet obligations starting in fiscal year 2015. Under current law, the Highway Trust Fund cannot incur negative balances and has no authority to borrow additional funds….As a result, under CBO’s baseline projections, the highway account may have to delay some of its payments during the latter half of 2014.
Even though the message was buried in a footnote, that’s about as dramatic as CBO ever gets.
The problem: The trust fund is financed largely through motor fuels taxes. For years, spending has exceeded revenues from those levies, which Congress has not increased since the early days of the Clinton Administration. The problem has gotten worse as greater fuel efficiency and recession-reduced travel have eaten into existing gas tax revenues. Advocates estimate that projected spending under the current highway bill will exceed current tax revenues by at least $100 billion over the next six years.
The story is even worse, however: The fund’s main revenue source is an 18.4 cent-per-gallon gasoline tax, but all but 4.3 cents of the levy is temporary and will expire in September unless Congress acts. You see where I’m going here.
How did we come to this? After all, just about every lawmaker gives speeches about needing to “maintain the nation’s infrastructure.” Democrats love these projects because they create publicly-funded jobs. Pro-business Republicans love them because (some of them at least) enhance commerce. And nearly every pol, regardless of party, loves those ribbon cuttings.
What they don’t love, it seems, is paying for all that asphalt.
A few lawmakers have noticed. Last week, Senate Budget Committee Chair Patty Murray (D-WA) warned of the coming deadline.
And just before Congress left town for two weeks, four senators (two Democrats and two Republicans) called for a long-term extension of the trust fund. Except they couldn’t agree on how to fund it.
A year ago, former Senate Finance Committee Chair Max Baucus (who since resigned to become ambassador to China) cobbled together a bill to continue the gas taxes at their current rate through 2015. But even that would have done nothing to cover the ongoing revenue shortfall, so he shifted other federal revenues and added a few modest revenue raisers (though no tax increases) to the pot.
President Obama has proposed filling the empty tank with corporate tax revenues—a non-starter in Congress.
House Republicans promise their own bill by summer but have yet to propose anything.
Thus, the problem remains. The trust fund is supposed to be financed mainly by motor fuels taxes. The taxes are not sufficient to keep the program going. But Congress is terrified of raising the levy. So the program stumbles on, held together with the fiscal equivalent of duct tape.
The only certainty is that the gas tax does not raise enough money to finance existing transportation programs. States cannot plan for long-term projects. And an opportunity to maintain and expand roads, bridges, and mass transit–which nearly everyone claims to support—goes by the boards.
Where is this all headed? Most likely a temporary fix funded with largely fake money. Sort of a doc fix on wheels. Something to keep in mind as you hit another pothole on the way to the post office to file your income tax return.
One of the biggest selling points for tax reform is the claim that a new and improved revenue code would be easier for taxpayers to manage. Along with economic growth and fairness, simplicity has been a watchword for reform for decades.
But a striking new survey by the Associated Press-GfK has me wondering whether anybody cares. The poll, taken in the midst of tax season, finds that 58 percent of those surveyed think filling out their tax forms is “easy.” Only 38 percent say it is “hard.”
The poll provides one big clue why: The vast majority of people don’t actually fill out their tax returns. More than 4 in 10 said they use software and nearly half reported using a professional preparer. Only 7 percent said they fill out forms by hand. Btw, actual filing data this year are close to this, though somewhat different: About 11 percent have filed by hand.
For the vast majority of taxpayers, filling out their returns really is easy. More than two out of every three take the standard deduction. The vast majority report only wage income. Only about one in ten report capital gains or losses (you can learn more about who claims what with TPC’s new interactive tool).
More than 4 in 10 taxpayers don’t even file the Form 1040—they use either the easy 1040A or the really easy 1040EZ. Life isn’t so simple for everyone with only wage income and the standard deduction. For instance, the instructions for the Earned Income Tax Credit (an important subsidy for low-income working people) can be a minefield.
But even those with uncomplicated lives have turned to software or walk-in tax prep services such as H&R Block or Jackson Hewitt. So whether you only have to keep track of your W-2 and count up the members of your household, or have a shoebox full of 1099s and K-1s, tax filing has come to this: You spend time assembling paper and either plug the numbers into little boxes on your computer screen or shlep the whole business off to your tax preparer, who plugs the numbers into little boxes on his computer screen.
This is tedious and often annoying. But it isn’t hard. Nobody has to do the math any more. And no longer do they have to follow those IRS instructions that get you to the right answer even if they seem downright bizarre.
There is a fascinating paradox to tax filing: The rules got so complicated that they created the booming tax-prep business. Once we took the leap and paid TurboTax $59 for its software, or paid a CPA or storefront preparer, we became immune to the code’s increasing complexity. And the less we cared, the more complicated Congress was willing to make it.
For example, I’m convinced that the Alternative Minimum Tax would have been repealed years ago if people had to fill out the Form 6251 by hand. But if Turbo or Block does it for you, who cares how incomprehensible it is?
This phenomenon—sometimes called the Turbo Tax effect—is hardly new. But the Ap-GfK poll confirms its importance.
This may not be the end of the story, however. There is still a price to complexity: A complex law is almost by definition opaque. And people who don’t understand the tax code often believe it is unfair. They think they are getting the shaft while their neighbor is driving his new BMW through some lucrative loophole.
So maybe there is still an opening for reformers, as three political experts discussed at a Tax Policy Center panel in March. But the message may have to be built around fairness, not simplicity.
In an important new paper, Eric Toder of the Tax Policy Center and Alan Viard of the American Enterprise Institute say that corporate tax reforms now being debated in Congress fall far short of solving the widespread problems with the levy. Rather than merely lowering rates and tinkering with tax rules for U.S.- based multi-national corporations, as President Obama and many members of Congress have proposed, Toder and Viard argue that the corporate system needs what they call “major surgery.”
In a paper funded by the Peter G. Peterson Foundation, they propose two alternatives: Either build a tax based on a broad international agreement on how to allocate corporate income among countries, or kill the corporate income tax entirely and replace it with a direct tax on shareholders. In such a system, capital gains would be taxed as they accrue rather than when they are realized upon the sale of shares.
Toder and Viard have both been around Washington a long time and neither has any illusions about the political and technical challenges of either change. But, they argue, the policy options currently on the table “fail to resolve the fundamental contradictions in the current corporate income tax.”
The corporate tax has many well-known shortcomings. Two of the biggest: It’s inability to respond to both the explosion of international commerce and the growing share of corporate income produced with intellectual property. Because the U.S. tax on multinational corporations is based on corporate residence and income source—economic concepts that increasingly lack clear meaning in the real world—it is relatively simple for firms to manipulate the law to reduce their tax liability.
They argue that current reform proposals could improve matters on the margin, but can’t resolve these basic contradictions. Neither would the extreme options of either taxing accrued income of U.S. multinationals on a world-wide basis or exempting foreign-source income from tax.
World-wide taxation might prevent U.S. multinationals from shifting reported income to low-tax countries, but it would also place them at a competitive disadvantage if other countries don’t impose similar rules on their multinationals. A pure territorial tax that exempts all foreign-source income would make U.S. multinationals more competitive, but would encourage them to shift investments and reported income overseas.
What to do? As Viard and Toder see it, there are two options. Neither is perfect but both address the problems a single country has in imposing unilateral tax rules on global entities.
The first would encourage the United States to seek an agreement with other countries on a uniform rule for allocating corporate income among jurisdictions. For instance, countries could apportion income by formula, or agree to tax income from intangibles (such as patents) based on the location of sales. The base erosion and profit shifting (BEPS) project at the OECD, undertaken at the request of the G-20, is exploring ways countries can cooperate to reduce tax avoidance by multinationals. But the OECD has not yet addressed the basic issue of how to allocate profits of multinationals.
Alternatively, the U.S. could scrap its corporate income tax entirely for publicly-traded companies. U.S. shareholders would be taxed directly at ordinary income tax rates on their dividends and accrued gains, with a deduction for accrued losses. The tax would be based only on the residence of the shareholder, not of the corporation or on where it earned its income. Owners of closely-held businesses would pay individual income tax on their firm’s profits, just as partnerships and S corporations are taxed today.
While this design is simple, it raises many technical issues: What about shares held by tax-exempt investors such as charitable organizations or qualified retirement plans? Today, they indirectly pay corporate income tax but in this new model they’d pay no tax at all on these shares. How do you allocated profits among multiple classes of stock? What happens to existing business tax preferences, which would disappear for publicly-traded corporations but could remain in place for other businesses? [HG1] While Eric and Alan suggest some solutions, they acknowledge these are difficult issues.
Finally, there is the cost. TPC estimates that shifting to a shareholder tax would reduce federal revenues by $168 billion at 2015 income levels. How does Congress make up that lost revenue?
Viard and Toder have come up with some creative solutions to a knotty problem. At the very least, they’ve given tax wonks something to talk about. And, with luck, they may help convince lawmakers to break out of today’s non-productive corporate tax debate.
They are discussing their recommendations at a panel discussion this morning at AEI. You can link to the Webcast here.
The House Republican budget, released today by Budget Committee Chair Paul Ryan (R-WI), kicks the tax reform can down the road yet again. Not only does it fail to enhance chances for a tax code rewrite, it almost certainly sets the effort back.
This budget isn’t so much an actual fiscal plan (the framework for the 2015 budget was worked out by Congress months ago) as a campaign manifesto. And as such, it hits the standard GOP themes: Repeal “Obamacare,” spend more money on national defense, turn Medicaid into a block grant to states, and the like.
And reform the tax code. But the budget explicitly avoids proposing any plan. In the budget panel’s official 99-page description of the budget, tax reform is covered in 2 ½ pages. There are gauzy platitudes galore. For instance, it tells us “a world class tax system should be simple, fair, and promote…economic growth.” Um, OK.
It tells us the House GOP has a “goal” of collapsing the current individual rate structure into two brackets—10 percent and 25 percent. And it includes some generic criticism of “special interest…loopholes.”
But to the surprise of absolutely no one, this budget includes no specific proposals for cutting any of those tax preferences. Not a single one. And it effectively turns its back on the tax reform plan drafted by Dave Camp, the GOP chairman of the House Ways & Means Committee.
Well, you might say, budget committees don’t normally draft specific tax bills. They leave that job to the tax-writing panels. You’d be right. Except, of course, the chairman of the tax-writing Ways & Means Committee has drafted a reform plan. But you’d hardly know it by looking at this budget.
Indeed, the budget summary explicitly “does not embrace any particular plan.” Oh, it has two nice sentences about Camp’s reform. But it says there are “many good plans” and throws Camp’s onto a list with ideas from Rep. Michael Burgess (R-TX), who would replace the income and payroll tax with a flat 17 percent wage tax; and Representative Rob Woodall (R-GA) who’d replace the existing code with a national retail sales tax.
The unwillingness of the House GOP leadership to distinguish between Camp’s serious but difficult plan and two largely discredited ideas is symptomatic of the state of Republican politics these days. It does, however, give lawmakers some cover in November. When Democrats accuse them of backing Camp’s plan to trim the mortgage deduction, as they surely will, now Rs can say, “Oh no, I didn’t vote for that. I voted for a budget that called for a ‘world-class tax system.’ ”
I won’t blame Ryan for this budget, which seems to be more the work of the House GOP leadership. And I don’t know if it will prove to be useful grist for campaign ads. But as a policy document, the tax section is not serious.
House Ways & Means Committee Chair Dave Camp (R-MI), who said yesterday that he’ll retire from Congress at the end of the year, will leave behind an enormously important achievement. At a time when too many of his fellow lawmakers substitute easy partisan rhetoric for hard work, Camp wrote a serious tax reform plan.
His plan won’t become law. But when Congress finally gets around to rewriting the tax code, many of its elements will be in the final version. And perhaps even more important, Camp’s fully realized bill will change the political dynamic of the reform debate. His courage has made it possible for other lawmakers to candidly confront the need to cut specific tax preferences as part of any serious reform. And he has set a benchmark that will make life blessedly difficult for those who try to claim that they can magically reduce tax rates by merely eliminating unnamed “loopholes.”
Dave Camp has made it easier for all of us to ask the obvious question of the authors of future half-baked reforms: But how are you going to pay for your tax rate cuts? How will your plan differ from Camp’s?
Camp, who is just 60, didn’t say why he was retiring. But it can’t have been an easy few years for him. He’s known since he took on tax reform that he faced a deadline—that six-year term-limit as the committee’s top Republican. He’s battled cancer. And he’s battled his own deeply-divided party.
Camp spent years patiently and painstakingly educating House Republicans about the political and economic realities of reform. Yet, in the end, his effort yielded tragically little support. Some House Republicans preferred bashing President Obama to engaging on reform. Others just didn’t have the guts to talk honestly about dumping popular tax breaks as the price of lower rates. In the end, even his own party’s leadership left Camp hanging out to dry.
I can’t imagine what went through Camp’s mind when, after years of work, he finally rolled out his reform plan and his own Speaker responded with an insultingly dismissive, “Blah, blah, blah.”
John Boehner has had more than a few low moments in his troubled speakership. Few were lower than that.
And with Camp on a partisan island, it was easy for Democrats to respond with little more than vague platitudes. They complimented him on his courage and hard work but said almost nothing about the merits of his plan.
Camp’s proposal isn’t perfect by any means. In a misguided effort to make it look as if it set a top individual tax rate of 25 percent, Camp relied on a pile of bubbles, phase-outs, and hidden rates. And while the plan would raise roughly the same amount of money as the current tax code for its first decade, it would very likely add trillions to the federal deficit after that.
But it is also filled with dozens of good ideas. It would increase the standard deduction, limit the value of the mortgage interest deduction, entirely eliminate other mostly-useless preferences, and rationalize overly complicated rules for education subsidies and retirement plans.
I hope that when some future President finally signs a tax reform law, Dave Camp will be invited to the ceremony. He will deserve the thanks of whoever finally gets credit for rewriting the revenue code. And he deserves our thanks.
Maybe the best way for tax reformers to get political traction is to focus on values, not economics. That, at least, was one take-away from three political scientists who spoke at a Tax Policy Center panel today.
Until now, backers of reform have focused primarily on economic arguments: A reformed tax code would increase growth or create more jobs. But they may do better on issues such as fairness, according to Karlyn Bowman of the American Enterprise Institute; Chris Faricy, an assistant professor of political science and public policy at the Maxwell School at Syracuse university; and Bill Galston of the Brookings Institution.
In the current environment, none of the panelists felt reform would happen any time soon. Its best bet: A president who uses it as a springboard to prove he or she can break though partisan gridlock and get things done in Washington.
Bowman noted that tax reform is not a top priority for the public today, an attitude that could make reform easier than higher-profile yet more controversial issues. Still, other public attitudes could make a rewrite more challenging that it was 30 years ago.
For instance, she noted that when Congress was debating the 1986 tax reform, most people thought their own taxes were too high, President Reagan was enormously popular, and more than 40 percent of the public told pollsters they trusted government. All of these attitudes made it relatively easy for Congress to enact reform, despite overall public indifference to the specific legislation.
Today public attitudes are quite different. Half of those surveyed think the amount of tax they pay is “about right.” And only about 15 percent say they trust government. If people have relatively few complaints about their taxes, will they be willing to let a government they so distrust rewrite the law?
Faricy’s research shows that public support for deductions and credits is “wide but not deep” and very much driven by broader political views.
For instance, he found that most people favor tax subsidies. But when they are told that higher income households are more likely to benefit from the subsidies than others, support fades among independents and Democrats. But conservatives and Republicans continue to support the preferences. That partisan split could make reform more difficult.
Galston noted that in 1986, Ronald Reagan made both an economic and a values-oriented argument for reform that resonated strongly with the public.
Galston suggested that while tax evolution may not attract the public’s attention, “tax revolution” might. One strategy: A broad-based carbon tax tied to cuts in payroll taxes. Such a move could tie tax reform to support for environmental protection.
Yet, even that idea would bump against the public’s resistance to more modest measures such as a gas tax increase.
Bowman, Faricy, and Galston agreed that any reform must have strong bipartisan support, and that winning such backing in the current political environment would be a massive challenge. However it is presented, tax reform has a tough uphill battle. But understanding its challenges can help start the process.
Everyone agrees that the tax code is a mess. So why is it so hard for Congress and the President to fix it? On Monday, the Tax Policy Center will host three top political experts who will explain why reform is such a challenge and how backers could overcome its hurdles.
It won’t be easy. As observers of House Ways & Means Committee Chair Dave Camp’s tax reform effort have seen, the idea has no natural constituency (except perhaps economists).
Some political headwinds apply to all big reforms. They are complicated and hard for real people to understand, the public mistrusts the motives of politicians who claim to be reformers, and voters doubt government’s ability to get the changes right. Lawmakers today are in no mood for a grand bargain on anything. And then there is every pol’s legislative Rule #1: Those who benefit from the reform will never thank you but the losers will squeal like stuck pigs.
Worse, tax reform has its own unique problems. By its very nature, real reform creates lots of winners and lots of losers. It’s hard to make a political case for concepts such as fairness—an aim of reform that’s often misunderstood. And there is no simple bumper-sticker goal. For instance, it is hard to make a credible case that reform will unambiguously create jobs and grow the economy (though supporters will certainly try).
Yet, tax reform has been possible in the past. It happened in 1986 when the unlikely team of Ronald Reagan, Dan Rostenkowski, Bob Packwood, Bill Bradley, and Jack Kemp overcame public indifference and skeptical lawmakers to rewrite the tax code.
Could political lightning strike again? And how? To answer these questions, TPC will host a panel discussion on Monday at Noon with three of the nation’s leading scholars on the politics of tax reform.
Speakers will be Karlyn Bowman of the American Enterprise Institute, a highly-respected expert in public opinion research; Chris Faricy of the Maxwell School at Syracuse University, who is doing cutting-edge research on public attitudes toward taxes; and Bill Galston of the Brookings Institution, a political scientist and sage observer of Washington policy-making. I’ll have the pleasure of moderating. Join us if you can, either in person or by Webcast.
House Ways & Means Committee Chair Dave Camp (R-MI) has a plan for what to do with scores of now-expired tax subsidies that are sitting in Congress’ lap. He wants to review each one on its merits and either make it permanent or (by implication at least) kill it. Camp is on to something, although his strategy would have some very important—though complicated and troubling– political and fiscal consequences.
Camp’s strategy puts him at odds with Senate Finance Chair Ron Wyden (D-OR), who wants Congress to quickly restore all the expired provisions for a year or so. And Camp’s schedule, which anticipates a long round of hearings and mark-ups, pretty much guarantees that Congress won’t act on these mostly business subsidies before the November elections.
I’m mostly with Camp on this one. My TPC colleague Donald Marron cleverly—and accurately—refers to the temporary provisions as tax expirers, not tax extenders. In fact, they’ve been off the books since last Dec. 31(making them the tax expired, as it were). And Congress ought to treat each just like any proposal for a new tax cut. Hold a hearing, decide whether it passes equity and efficiency tests, and pay for it.
Camp promises to do most of that—except for the all-important pay-for-it part. No promises there. And that’s where he and I part company.
By making these subsidies permanent, Camp would put all the restored tax breaks in the long-term budget baseline. The cost of doing so would be dramatic—roughly $900 billion over 10 years, according to the Congressional Research Service. Permanently restoring some of these subsidies would make the real long-term fiscal price transparent, but only if Camp offsets the cost with specific tax increases or spending cuts.
This is especially important because it has huge implications for tax reform. In effect, it would make a big chunk of that $900 billion available to pay for tax rate cuts. To see how, let’s walk through the intricacies of budget scoring.
For decades, lawmakers manipulated the system by continuing these tax breaks one year at a time–and only occasionally paying for them. Because the Joint Committee on Taxation provides a 10-year score for all legislation, lawmakers could spread the cost of a one-year extension over a decade, making it seem far cheaper than it really was.
This bit of legerdemain has been critical for pols who wanted to avoid paying for the tax cuts. After all, it is a lot easier to explain away adding $50 billion to the deficit over 10 years (the cost of restoring the expired provisions for one year only) than adding $900 billion (the cost of resurrecting all the same breaks for a decade). And, of course, they’ve done this year-after-year.
But making the tax cuts permanent would turn this practice on its head. If you want to do broad-based tax reform, as Camp does, you need the full 10-year cost of these subsidies in the baseline. Why? Because when you need to pay for tax rate cuts, you’ve got up to $900 billion (depending on which cuts are made permanent) instead of a mere $50 billion. Think of it as fattening a pig before you slaughter it.
But Congress still has to pay for restoring those tax cuts. Rolling them into the long-term baseline does not make their cost disappear. We have to borrow the same $900 billion to pay for them.
Making some of these tax breaks permanent would have significant consequences. The folks at the Committee for a Responsible Federal Budget took a close look yesterday at one—a measure that allows firms to take very generous first year tax deductions for the cost of new plant or equipment. This was supposed to be a temporary tax break aimed at stimulating the economy after the Great Recession. But even though many firms are swimming in cash and business investment is strong, lawmakers want to bring back this “bonus depreciation.”
A one year restoration would add about $5 billion to the 10-year deficit. But CRFB estimates that making it permanent would add $300 billion in red ink over 10 years.
Camp is right to put the real 10-year cost of these tax preferences in the budget baseline. But Congress’s review of their merits needs to be more than perfunctory. And any restoration of these subsidies needs to be paid for. Doing any less would merely substitute one budget gimmick for another.