The taxing question Congress is facing
Congress has a lot of bad habits, none more maddening than passing temporary tax deductions and credits for special purposes and special interests. In theory, this enables lawmakers to reassess them periodically, keeping the ones that work and discarding the rest. In practice, temporary provisions become permanent through the annual legislative log-rolling known as a “tax extenders” bill. It’s a full-employment exercise for lobbyists that in recent years has lumped some sound policies (a business credit for research and development) with others that are obscure (a break for rum makers in Puerto Rico and the Virgin Islands), wasteful (wind energy subsidies) and plain old indefensibly parochial (a break for auto racetracks).
Tax extenders used to be “must-pass” legislation because the bill included an annual “fix” to the alternative minimum tax that would otherwise clobber the middle class; Congress saw no need to pay for it with offsetting tax increases or spending cuts. But Congress enacted a permanent repair to the AMT in the “fiscal cliff” deal at the beginning of 2013. As a result, the tax extenders bill lost a lot of its political urgency, and Congress did not pass one before Dec. 31. The expired provisions, totaling $54.2 billion, must be addressed retroactively in the coming weeks if they are to be addressed at all.
The remaining question is whether Congress will break with past practice and pay for the bill. Last December, Senate Majority Leader Harry Reid, D-Nev., tried to pass a tax extenders bill without offsetting spending cuts or revenue increases, but he was thwarted by Republican objections. On Thursday, Reid announced that the Senate wouldn’t tackle the issue again until Sen. Ron Wyden, D-Ore., takes over as chairman of the Finance Committee upon the departure of Sen. Max Baucus, D-Mont., to the U.S. Embassy in Beijing.
Wyden, and his opposite number in the House, Ways and Means Chairman Dave Camp, R-Mich., will face pressure to pass an unpaid-for bill, with the excuse that all tax breaks must be dealt with in a grand bargain on tax reform. That’s a fiscally irresponsible cop-out — and a hypocritical one, too, given that the House-Senate budget deal was premised on offsetting relief from sequester spending cuts. Even if it’s unlikely the tax-writers could get an agreement to eliminate or pay for the entire package, they could target the most expensive, least-efficient breaks.
A good candidate is bonus depreciation, which lets businesses deduct the cost of capital equipment in the year of its purchase, rather than more gradually. This provision accounts for nearly one-tenth of the bill’s cost, according to the Committee for a Responsible Federal Budget. But a 2008 Congressional Budget Office report found it of questionable efficacy as a recession-fighter. It’s even less justifiable now that the recovery is picking up steam and U.S. corporations are flush with $1.8 trillion in cash, according to the Federal Reserve Bank of St. Louis.
It’s time for Congress to break a bad habit, tax log-rolling, and start a good one — tax policymaking.