Tax Analysts Blog

Oh, No! The Recession is Almost Over

Posted on Sep 25, 2009

There is a good chance that before lawmakers finish their work this year they will pass a tax bill that temporarily extends dozens of perennially expiring tax provisions. "Extenders" -- as they are called on Capitol Hill -- include the research credit and individual relief from the ever-encroaching alternative minimum tax. This year they also include the highly popular $8,000 first-time homebuyer credit scheduled to expire November 30. The Washington Post reports that Senator Majority Leader Harry Reid, D-Nev., leads a bipartisan group that wants to extend the credit through June 2010 (at cost of $15 billion). Sen. Johnny Isakson, R-Ga., wants to increase the tax credit to $15,000, extend it for a full year, and make any buyer of any home eligible (at a cost of $38.5 billion).

It is almost certain Blue Dog Democrats will insist these tax cuts are paid for. Luckily for all involved, due to funky budget rules in place during passage, the Bush tax cuts enacted in 2001 repeal the estate tax entirely in 2010 and then reinstate it in full in 2011. With the Democrats in control there is no way the estate tax will be allowed to lapse in 2010. So they have a ready-made no-tears revenue raiser on the shelf to pay for the extenders.

The Obama Administration has not yet voiced an opinion in public on this approach to extenders. No doubt it is waiting to see how it can use its endorsement of (or threat of nonsupport for) the plan to give it some extra leverage in its push for healthcare reform.

Of course, if the Administration and Congress were really as serious as they claim to be about deficit reduction they would dedicate revenue from reinstating the estate tax in 2010 to that cause. They could find other revenue raisers to pay for extenders. Or -- dare we say it -- allow the extenders to expire.

Because nobody knows exactly when the government should take its foot off the gas and start applying the budget brakes, politicians for now can err on the side of fiscal promiscuity in the name of saving jobs. But the day will come -- probably sometime early next year -- when they will run out of economic justification for doing what they want to do anyway. Then all hell will break loose. If you think tempers were hot Thursday in the Finance Committee healthcare mark-up, you ain't seen nothing yet.




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