On New Years Eve, while fireworks were going off to celebrate the arrival of 2014, a number of different tax breaks and incentives expired. These tax provisions are collectively known as the “tax extenders,” a set of breaks for activities that range from deductions for higher-education tuition to special treatment for film and TV productions to the research and experimentation tax credit. The extension of many of these tax extenders has become an annual tradition and a cause for legislative fireworks.
The tax extenders are available for those currently filing their 2013 taxes this spring. They expired at the end of the year so their fate for the 2014 tax year remains uncertain.1 Recently, members of Congress on both sides of the aisle have proposed to renew or make permanent some (or all) of the tax extenders without offsetting this renewal with higher revenues or lower spending. Extending them without offsets would be shortsighted, given the nation’s long-term budgetary challenges, and renewing them only temporarily will not give individuals and businesses certainty about their future tax burdens. Congress should decide which of the expired features are important parts of the tax code, should permanently extend them and pay for them with equal offsets, and allow the rest to remain expired.
What are the Tax Extenders?
The tax extenders are a collection of somewhere between 55 and 64 (depending on how you count subparts) different federal tax provisions that have recently expired. Some, like the credit for research and experimentation, have been renewed periodically for decades. Others are relatively new, like “bonus depreciation,” which was introduced as a temporary boost to the economy as part of the 2009 American Recovery and Reinvestment Act (known as ARRA or the “stimulus”). Many of the tax extenders affect corporate taxation and several are related to renewable or alternative energy.
And their costs vary widely.2 Bonus depreciation is by far the largest single tax extender. A permanent extension would cost approximately $380 billion between 2014 and 2024. The next largest is the credit for research and experimentation, which would cost approximately $90 billion over ten years. Some of the smallest provisions would cost only $0.01 billion ($10 million) to extend for a decade. In total, the ten-year cost (in the form of reduced revenues and higher interest payments) for permanently extending all of these recently expired provisions would be about $940 billion.
One way to pay for a permanent extension of some of these provisions would be to adopt the chained consumer price index (CPI) for the indexation of certain parameters in the tax code as recommended by both BPC’s Domenici-Rivlin Debt Reduction Task Force and House Ways and Means Chairman Dave Camp’s (R-MI) recent plan for tax reform. Under current law, those parameters in the tax code that are adjusted to count for inflation, including income thresholds for tax brackets and credit, deduction, and exclusion amounts, are indexed to the CPI for all urban consumers (CPI-U).
Chained CPI is a better measure of the inflation consumers actually experience than CPI-U because it makes an important computational correction and better accounts for the fact that consumers change their buying habits when the price of one good rises relative to another. Chained CPI grows more slowly than CPI-U, so switching would increase revenues by making more income subject to higher marginal rates and lowering the real value of deductions, credits, and exclusions over time. This provision would raise approximately $165 billion over ten years ? which could pay for the research and experimentation credit and more.3
What do President Obama and Chairman Camp propose?
President Obama’s budget proposed to make some of the tax extenders (including the research and experimentation credit) permanent and to allow others to expire.4 Because his budget lays out a wide variety of policy changes that would reduce the deficit as well as a plan for revenue-neutral corporate tax reform, exactly how the president “pays for” individual tax extenders is unclear but he retains some and removes other revenue-losing provisions from the tax code that results in a net increase in revenues.
Chairman Camp’s plan for tax reform proposed to repeal some of the tax extenders, temporarily continue others, and permanently retain some. For example, the reform would permanently extend the main research and experimentation credit with some slight modifications, while allowing several other research-oriented credits to expire. Importantly, Camp’s plan for revenue-neutral tax reform would pay for the tax extenders that it included.
What’s BPC’s Position?
The BPC Domenici-Rivlin Debt Reduction Task Force proposed to eliminate almost all of the tax extenders other than the tax credit for research and experimentation. This credit helps incentivize risky scientific work that may not be immediately commercially viable but could ultimately be impactful. There may be ways to improve the structure of this credit and BPC supports efforts to meet the goal of this credit more efficiently.
Allowing parts of the tax code to expire annually is inefficient and makes long-term planning difficult for both individuals and businesses. Furthermore, failing to pay for the tax extenders would leave the revenue baseline at an unsustainably low level. Congress should pick and choose among the tax extenders and make the best ones permanent, pay for them, and let the others stay expired.
Alex Gold contributed to this post.
1 One of the tax extenders actually expired in July of 2013.
2 Cost estimates in this blog post include projected increases in net interest payments resulting from these policies.
3 The newest CBO estimate of the provision is for the period from 2013-2023 assuming that the policy was instated January 1, 2014. A revised estimate would likely yield a similar ten-year score.
4 In addition to those tax extenders that expired at the end of 2013, the president also proposed permanently extending several refundable tax credits that are set to expire in the latter half of the decade.