In April the Senate Finance Committee agreed to a two-year extension of over 50 expiring tax provisions. The estimated cost is $88 billion over 10 years.
Over on the House side, in a series of bills, the Ways and Means Committee approved the permanent extension of 11 expiring provisions. Nine of them have been approved by the full House. The estimated cost is almost seven times larger than the Senate bill, $590 billion over 10 years. (See the table below.)
Most of these provisions expired at the end of 2013. Families and small businesses expecting refunds need Congress to enact something before year-end so they can file their tax returns for 2014 in early January. Publicly traded businesses would like to report lower effective tax rates for 2014. And the IRS would like to get its forms, instructions, and computer programs in order as soon as possible. These are compelling reasons to pass a final extenders bill promptly during the lame-duck session. But the extenders bill has significance beyond preventing needless tax compliance and administration headaches.
Usually anybody in Congress who wants a tax break has to figure out a way to pay for it with spending cuts or offsetting tax increases. But for the extension of expiring provisions there is a different set of rules. Congress has decided that for an extenders bill, offsetting tax increases or spending cuts are not needed. That’s gain with no pain. That makes an extenders bill a totally different animal than most tax legislation.
In the past, something like the Senate bill was the norm -- change the dates, make some minor modifications to the operation of the extended provisions, and decry the fact that extensions can’t be made permanent.
But this time around—especially after their success on November 4—Republicans want to do much more. They would like to extend most expiring provisions permanently—as the House has already done for some of the largest expiring provisions. (We say “most” because many Republicans adamantly oppose tax breaks for alternative energy.) So in the coming weeks there will be a big battle between Democrats and Republicans over how far beyond two years extenders should be extended.
Permanent extensions would provide Republicans with two big benefits.
First, they would rack up an enormous amount of tax relief that under any other circumstances would be impossible.
Second, they would shift the official current-law revenue baseline significantly downward. Because tax reform traditionally is scored relative to this baseline, shrinking it means tax reform is much easier to pass. If you don’t like talking about baselines—nobody does—think about it this way: Every dollar of tax reduction that can be crammed into an extenders bill free of charge is one less painful dollar that any future revenue-neutral tax reform will need to raise.
In February Ways and Means Committee Chair Dave Camp offered a serious tax reform draft. The ice-cold reception it got—even from fellow Republicans—proves how difficult passing tax reform will be. If extenders are made permanent, a revenue-neutral tax reform can lower rates with a lot less of those politically painful cuts in current tax benefits--hundreds of billions of dollars less.
Extenders legislation is not just about the fate of a grab bag of miscellaneous tax provisions this year. If Republicans can get expensive expiring provisions permanently extended, the chances for enactment of tax reform will be significantly improved.
This post is based on an article in the November 17 issue of Tax Notes.