The COVID-19 pandemic has given some in Congress an added sense of urgency to extend the multitude of expiring tax provisions that come up for review every year. Historically, Congress waits to extend these temporary provisions retroactively after they expire. A new list of time-limited provisions from the spring’s coronavirus relief legislation is adding additional pressures to the standard process.
As the pandemic and economic hardship continue into the winter, the confluence of an additional coronavirus relieve package, the regular expiring tax provisions, new coronavirus provisions, and a lame-duck omnibus spending package creates a high risk of another temporary extenders package. Temporary tax extenders are a failure of fiscal policy and poor economic policy, regardless of the urgency of the moment. None of the 55 provisions expiring in 2020 or 2021 should be cause for passing a temporary extenders package. Most should be allowed to expire permanently. The ritual extension of these temporary provisions ensures that the worst and most narrowly targeted subsidies endure year after year.
Tax Extenders Are a Failure of U.S. Fiscal Policy
Few policies encapsulate the dysfunction in the U.S. tax code as well as temporary and often-retroactive tax extenders. Despite broad bipartisan consensus in 2019 to allow the 34 temporary tax provisions to expire permanently, Congress renewed the package of narrow tax subsidies as part of a big end-of-year spending package. Similarly, the 2017 tax reform was supposed to end the practice of tax extenders, but the final law expanded the importance of temporary policy.
A permanent tax code is a cornerstone of good fiscal policy. It provides certainty to businesses, investors, and individuals who want to know what their tax burden will be when their long-term investments begin to bear fruit. This certainty supports the decisions and investments that ultimately produce the most economic growth. Retroactively extending temporary tax credits and deductions, as often occurs in tax-extender legislation, can only be described as the work of an economic schizophrenic. Extending taxpayer-funded subsidies for activities performed in previous years, when the credit or deduction was unavailable, does nothing to incentivize desirable investments, as it largely provides a windfall for investors.
Temporary tax policy also breeds corruption. Tax extenders empower politicians to request patronage from special interests on a semiannual basis and, in return, extend their narrow subsidies while hiding the budgetary cost. One-year and two-year temporary extensions misrepresent the true 10-year revenue reduction of the effectively permanent policy and make it harder to maintain a fiscally responsible tax code.
Most Extenders Are Subsidies or Duplication
Among the 37 traditional, non-coronavirus-related extenders expiring at the end of the year, 21 are subsidies, 14 duplicate existing provisions, and the remaining two should be debated independently on their merits. There are also six provisions expiring next year, at the end of 2021. (See Appendix Table 1.)
The majority of tax extenders are narrowly tailored credits for energy and environmental projects, education, health care, and other favored industries. These subsidies are often subject to fraud, do little to incentivize the behaviors they are intended to promote, and represent government efforts to pick winners in markets that are best governed by the forces of competition. Each of these should be allowed to expire.
A group of nine place-based subsidies for Empowerment Zones and other special jurisdictions duplicate Opportunity Zones, which were intended to consolidate and streamline existing programs. These incentives most often enrich a select few individuals and businesses without advancing the policy goal of improvements to employment or wages.
Unlike targeted tax credits, pro-growth tax policies allow economic growth by eliminating current disincentives to save and invest. Broadly available expensing treats investments more equally. There are seven tax extenders that allow this beneficial treatment only for certain interests, such as racehorses and biofuel property. The Tax Cuts and Jobs Act of 2017 offered expensing for short-lived assets, but this allowance begins to phase out after 2022. Narrow depreciation allowances should not be extended. Instead, Congress should make full expensing permanent and expand the treatment to longer-lived structures. This would boost output by incentivizing long-term investments, which are crucial to economic recovery and make the narrow tax provisions that accelerate depreciation schedules for certain investments unnecessary.
Coronavirus Should Not Add to Perennial Extenders
The Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act also included 12 additional expiring tax provisions that may put additional pressure on the extenders process. These provisions include smaller items, such as an excise tax exemption for alcohol used in hand sanitizer production, as well as more expensive provisions, such as a credit for paid family and sick leave and the suspension of aviation excise taxes. President Donald Trump’s executive order deferring payroll taxes also expires at the end of the year.
Despite the attractiveness of potentially extending these tax breaks and subsidies to protect those disproportionately affected by the pandemic, lawmakers cannot afford to turn these temporary relief provisions into perennial tax extenders. Turning emergency relief policies into quasi-permanent features of the tax code will muddy economic-recovery policy and unnecessarily add to the budget deficit.
If Congress pursues additional coronavirus relief, it must be absolutely necessary, it should be targeted only to those most in need, and must be time limited so that it does not become another perennial tax extender. None of the expiring provisions meet this threshold as they are currently written. Congress should carefully consider pandemic relief independently of the tax extenders.
Some Provisions Require Additional Consideration
A few expiring provisions could have economic benefits, and they should be debated on their individual merits. They should not be lumped together with special interest tax carve-outs or other must-pass bills.
Motivating some of the urgency for a tax-extender package this year is the fast-approaching expiration of excise-tax credits for small producers of beer, wine, and spirits. As a stand-alone policy, lower effective excise tax rates is a worthy goal, although it would be better to simply lower the tax rate for all producers. A proposal to make the craft alcoholic beverages credits permanent garnered 326 co-sponsors in the House and 73 co-sponsors in the Senate, more than enough to pass the stand-alone policy. However, Congress never acted on this legislation, and the provision was extended temporarily at the end of 2019, wrapped up in the larger package of less justifiable extenders.
Several other business provisions should be considered as part of larger reforms. Look-through treatment for controlled foreign corporations, may be worth making permanent to move the United States more toward a territorial tax system; but it should be done as part of a broader package that addresses other glitches, future tax rate increases, and unintended consequences in the new international tax system. Similarly, expanded access to net operating losses should be made permanent, and limits on interest-expense deductions should remain as they were at the beginning of 2020.
A Path Forward
As the economy begins to recover from the COVID-19 containment measures, Congress should resist the temptation to eschew stable pro-growth policy in favor of temporary and poorly designed tax provisions. Narrow, temporary tax preferences introduce unnecessary complexity and ambiguity to the tax code and do a poor job of targeting the desired activity. The myriad special interest tax provisions up for renewal this year and next are each uniquely flawed, and as a whole, represent a failure of fiscal policy. Refusing to continue the policy of tax extenders would be an admirable first step in creating a functioning and effective long-term tax code.
Adam N. Michel, PhD, is Senior Policy Analyst for Fiscal Policy in the Grover M. Hermann Center for the Federal Budget, of the Institute for Economic Freedom, at The Heritage Foundation. The author thanks Bernard Zitzewitz, member of The Heritage Foundation Young Leaders Program, for valuable assistance in research and drafting.