Failure to Govern: The Case of Temporary Tax Subsidies

COMMENTARY Taxes

Failure to Govern: The Case of Temporary Tax Subsidies

Dec 18th, 2020 2 min read
COMMENTARY BY

Former Senior Policy Analyst, Grover M. Hermann Center

Adam N. Michel focused on tax policy and the federal budget as a Senior Policy Analyst in the Grover M. Hermann Center.
It’s December and a lame-duck Congress is in session. In Washington, this means it’s time to play a game. But the game is rigged. yorkfoto/Getty Images

Key Takeaways

In most cases, the tax subsidies don’t even work as intended.

Even if tax credits did work, periodic temporary extensions are a poor way to construct tax, budget, and economic policy.

By picking winners and losers, these corrupt policies reduce opportunity for individual Americans and businesses that don’t have the ear of their congressman.

It’s December and a lame-duck Congress is in session. In Washington, this means it’s time to play a game. But the game is rigged. The winners are lobbyists and the politically well-connected; the losers are you and other American taxpayers.

The game works like this: Congress doles out “temporary” subsidies to prop up politically popular, fledgling industries that claim to need government help “just to get on our feet.” But these temporary subsidies seldom die. Instead, Congress keeps extending them time after time, even after other, newer programs are set up to replace them.

Welcome to the wonderful world of “tax extenders,” where expiring tax subsidies receive a new lease on life.

As this year winds down, lobbyists are working to revive about three dozen due-to-die subsidies, including giveaways for alternative fuels, two special types of vehicles, new solar investments, a tuna cannery in American Samoa, and certain coal owned by American Indian tribes, among others.

In most cases, the tax subsidies don’t even work as intended.

For example, a tax credit to encourage hiring of disadvantaged workers has been repeatedly shown to have no sustained effect on wages or employment. In a survey of 60 businesses that claim the credit, just one firm said the tax credit affected hiring decisions. Yet, between 1996 and today, the “temporary” Work Opportunity Tax Credit has been reauthorized 14 times at a cost of tens of billions of dollars.

Even when Congress tries to make improvements to existing policy, lawmakers can’t seem to make it stick.

In 2017, Congress created Opportunity Zones in an attempt to consolidate and streamline a group of expiring economic development subsidies that had consistently failed to improve community outcomes. Instead of allowing the New Markets Tax Credit and Empowerment Zones to expire as planned, Congress retroactively extended them in 2019, and they are back on the list to be renewed again this year.

Even if tax credits did work, periodic temporary extensions are a poor way to construct tax, budget, and economic policy.

Temporary reauthorizations mask the true cost of what are effectively permanent policy features. They provide an opening for politicians to request patronage from special interests on a semiannual basis and create economic uncertainty.

Often, Congress even waits until the year after the subsidies expire to retroactively reanimate them. Extending taxpayer-funded subsidies for activities performed in previous years, when the credit or deduction was unavailable, can only be described as the work of an irrational economist. Even Congress can’t incentivize investments that have already happened, making the subsidies just a windfall for investors and lobbyists.

Each of these extenders grants an economic privilege, tailored to some group or business interest represented by well-funded lobbyists. By picking winners and losers, these corrupt policies reduce opportunity for individual Americans and businesses that don’t have the ear of their congressman.

To make matters worse, good tax policy often gets held hostage by the bad. For example, last year, more than 70% of the House and Senate signed on to make lower effective tax rates permanent for small producers of beer, wine, and spirits last year—a good move. But instead of passing the bill on its own merits, the popular provision provided cover for the passage of a much longer and less justifiable list of targeted subsidies.

Less than a year later, the current tax extender urgency is again motivated by the popular expiring tax break for craft beverage producers.

In the coming years, Congress will face a growing number of expiring tax cuts. At the end of 2025, taxes are set to increase automatically, costing most Americans $1,000 or more. Rather than spend time and energy renewing a laundry list of narrow, supposedly short-term tax subsidies that benefit only the politically well-connected, Congress should focus on improving and making the tax code permanent for all Americans.

This piece originally appeared in The Washington Times