Tax Analysts Blog

Why the Upcoming Battle Over Expiring Tax Provisions Matters -- A Lot

Posted on Nov 17, 2014

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.

Read Comments (6)

amt buffNov 18, 2014

"Second, they would shift the official current-law revenue baseline
significantly downward."

...making it more realistic as a projection of actual future revenue and less
useful as a political weapon for people advocating higher-than-current tax

I believe that the fiscal baseline should reflect current spending and current
tax levels, not assume radical changes. The fact that the fiscal baseline is
not sustainable will then be more apparent. This in turn may induce the
necessary crisis mentality sooner that it would have arrived using a fantasy

edmund dantesNov 18, 2014

Temporary tax provisions might make some sense as short-term economic stimulus
in a severe downturn, but to resort to them generally has been unethical and
deeply political. Democrats have used them as an excuse to raise taxes, over
and over again. I would love for Tax Notes to compile a list of all the taxes
that were increased over the years to "pay for" yet another temporary extension
of the inflation adjustment to the AMT. That one was especially pernicious, and
especially dishonest. Thank goodness that particular inflation adjustment is
now permanent.

I expect the House to stick to their guns, and so there will be no extenders
before January. In the new Congress, a few extenders will be made permanent
and retroactive to the beginning of the year, the rest will be allowed to
expire. Finally.

bob kammanNov 18, 2014

No one files their returns in early January. Even in good years, IRS doesn't
accept returns until the last week or 10 days of the month.

Even if IRS accepted returns, no one would file because technology has delayed
issuance of W-2 and 1099 forms. In the good old days, bookkeepers and bankers
would pride themselves on getting these out as soon as the books were closed,
the first week in January. Now the payroll processing companies and global
financial institutions wait until the deadline, January 31, to mail them. They
know that if they send them out earlier, some will be misplaced by the time
taxpayers receive all of the ones they need, and they will have to fill
requests for replacements.

edmund dantesNov 18, 2014

BTW, those revenue numbers make no sense.

A two year extension of the research credit is $15 billion, but a five times
longer extension costs ten times as much, $155 billion. There must be some
extraordinary economic growth built into those models.

Far worse, two years of bonus depreciation costs $3 billion while ten years
costs $269 billion? Is that a typo? Nearly 90 times more cost? Could some
one explain how that is remotely possible? Some kind of super-duper dynamic
scoring rubric?

Similarly, I doubt that there is any meaningful cost to eliminating (or
keeping) the charitable IRA rollover. Taxpayers remain free to send their RMDs
to charity and take the tax deduction, which gives the exact same tax result in
90% of the cases. I'd love to know the assumptions behind that $8.4 billion
cost--do the scorers presume that no charitable contributions will be made from
IRA money? That's just goofy.

amt buffNov 18, 2014

ED, on charitable IRA rollover the scoring must assume that without the
rollover provision donors would die unexpectedly, with their IRA balances
mostly intact. Then the full income tax would be payable without any charitable

edmund dantesDec 2, 2014

I note that the Wall Street Journal endorsed my "let them expire" idea today on
their editorial page.

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