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April 7, 2014

Cutting short the ‘extenders’ would boost the economy

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Last week, the Senate Finance Committee blew its chance to enact small but meaningful tax reforms. On Thursday, lawmakers mechanically passed the so-called “tax extenders” bill — renewing some 50 tax-reducing policies that officially expired at the end of 2013.

Passing an “extenders” bill has become routine in Congress, a by-product of lawmakers’ fear of commitment when it comes to cutting taxes. Instead of embracing permanent tax cuts, Congress is now in the habit of passing “temporary” tax relief. Tax breaks are set to expire every year or two, and Congress just as regularly extends them for another year or two.

Still, the extenders bill presents Congress with an opportunity to make some pro-growth “fixes” to the tax code. To do that, however, lawmakers must avoid falling into the trap of trying to offset the supposed “cost” of extending them.

The temptation to do so arises because the Congressional Budget Office incorrectly scores an extension of previously-enacted tax cuts as if they were wholly new tax cuts. Under budgeting rules it follows, this means Congress must cut spending or raise other taxes to avoid “adding” to the deficit.

But reviving once again a repeatedly-extended tax policy is not a tax cut. These policies have been in place for years, some — such as the Research and Experimentation (R&E) Credit — for three decades. If they expire, taxes will rise on those taxpayers who use them. Extending them merely prevents a tax increase, so there is no need to offset their “cost.”

If Congress insists on paying for their extension by raising other taxes, it will create a paradoxical condition where it is raising taxes to keep from raising taxes.

Congress should also avoid the trap of extending all of the individual policies that make up the extenders in one large bundle. It should go through each individual policy and evaluate whether it represents sound policy. It should retain those that pass the test, and eliminate those that do not.

A few policies it should keep include the R&E credit; expensing for capital purchases by small businesses; bonus depreciation for all businesses; tax-free distributions from IRAs to charity; and the current treatment of financial businesses’ foreign income. All of these policies help limit the growth-inhibiting effects of the current code.

Provisions that represent sound policy but are narrowly construed to apply only to certain industries — such as shorter depreciation schedules for restaurants and retail stores, motorsport racing tracks, and certain kinds of film and television production — pose a greater challenge. Good policy should apply to all businesses, not just specific industries.

Policies Congress should unreservedly eliminate include all the energy provisions. They distort the market by tilting it towards certain renewable energy forms favored by Congress. It should also scrap increased subsidies for mass-transit and credits restricted to investment in only certain government-approved geographic areas. Government shouldn’t channel investment to “pet” jurisdictions, nor should it favor one form of transportation over another.

Under the CBO’s current rules, of course, eliminating policies that do not pass the test would constitute a tax increase. For this reason, Congress should treat the elimination of unsound policies in the tax extenders as a small-scale tax reform and institute pro-growth changes in the tax code that reduce taxes by the amount of revenue that eliminating unsound policies would raise. That way the bill would not raise taxes and would improve economic growth.

Some small-scale, pro-growth reforms to consider would be allowing small businesses to immediately deduct all their capital purchases and exempting taxpayers from paying interest on all or a portion of their savings.

The House Ways and Means Committee could undoubtedly come up with its own list of pro-growth improvements. And, now that the Senate Finance Committee has opted for reform-free extenders, Ways and Means members should fill the leadership void. They should evaluate each provision and credit and determine which should be dropped in exchange for more productive policies.

One other thing: Congress should make any improvements permanent. Then, it wouldn’t have to go through this routine every year. Instead, Capitol Hill could turn its attention to fundamental tax reform that would free the economy to grow at its full potential.

 - Curtis S. Dubay is a research fellow in tax and economic policy at The Heritage Foundation.

Originally appeared in the Washington Times

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