Why Is Congress Giving Away $500 Billion in Unfunded Tax Cuts?
Policy + Politics

Why Is Congress Giving Away $500 Billion in Unfunded Tax Cuts?

Flickr/C.M. Keiner

There isn’t a whole lot of bipartisanship in Congress these days, but Democrats and Republicans appear to agree that when cutting half a trillion dollars in tax revenue from the federal budget over the next decade, there’s no need to add offsetting spending cuts or revenue increases.

According to The Hill, House and Senate leaders are getting close to a deal on tax cuts that would give both parties some victories by making certain tax breaks they support permanent, while allowing Republicans to put a temporary halt to two of the more hated provisions of the Affordable Care Act (ACA).

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The deal would cost an estimated $500 billion over ten years, a tally that would spike significantly if the suspension of the two ACA taxes becomes permanent. There is no indication that the deal includes a plan to pay for the cuts.

Ed Lorenzen, senior advisor to the Committee for a Responsible Federal Budget, called the deal’s lack of offsets “troubling” and pointed out that it “will lock in much lower revenues and higher deficits for the next decade and beyond.”

A lobbyist close to the talks said on Tuesday that negotiators had reached agreement on virtually everything but a thorny dispute over a GOP effort to repeal a long-standing ban on the export of U.S. oil. Since 1970, Congress has made it illegal to export domestically produced crude oil without a license. But as domestic production has increased in recent years and oil prices have plummeted, the industry is pressing for a lifting of the ban.

Congress and the administration are on the verge of reauthorizing 55 or so obscure but often extraordinarily costly tax breaks that lapsed at the end of 2014 and must be reauthorized retroactively for the 2015 tax year.

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The emerging deal is contingent on a number of tradeoffs between the two sides that would make permanent a series of pricey business tax breaks and expanded benefits in the form of family and child tax credits.

As part of the overall agreement, Congress will postpone for two years implementation of three tax provisions important to the long-term operations and success of the Affordable Care Act – the so called “Cadillac Tax” on high-end, employer-provided health insurance plans; an excise tax on the medical devices industry; and a tax on health insurers.

The GOP won a reprieve for the expiring “bonus depreciation” break that allows businesses to write off 50 percent of the cost of capital investments immediately while the rest is deducted more gradually over time. The provision was first adopted during the financial crisis, and between 2008 and 2014 it cost the Treasury roughly $200 billion.

Under the emerging deal, the bonus depreciation would be phased out over five years. The research and experimentation tax credit, a favorable expensing provision for small businesses, certain charitable deductions and a deduction for state and local taxes would all be made permanent.

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In return, the White House and congressional Democrats would achieve permanent status for expansions of the Earned Income Tax Credit and Child Tax Credit, which helped lift 31.7 million people above or closer to the poverty line in 2013.

Both tax credits have garnered support from Democrats and Republicans alike and their underlying provisions are permanent parts of the tax code. But several key features of the tax credits, including a lower Child Tax Credit earnings exclusion -- which allows millions of working families to earn a bigger credit and means fewer working-poor families are shut out of the program entirely -- are due to expire in 2017, according to the Center on Budget and Policy Priorities.

Those provisions would be made permanent as part of the deal. However, Democrats failed in an effort to have the breaks extended to adults without children and non-custodial parents. According to some estimates, converting the improvements to the two credits to permanent status would cost roughly $100 billion over the coming decade.

The emerging deal also includes permanent status for credits for state and local income taxes, which was a personal priority of Senate Minority Leader Harry Reid (R-NV).

“Mostly the stuff that is made permanent, I’m told, is what Democrats and Republicans want anyway,” said the lobbyist, who added that the agreement puts an end to a charade of pretending these tax breaks are only temporary when in fact they are extended every one or two years.

“We’re avoiding another two year extension of all of the business tax breaks that only further embeds them into the very fabric of the extenders package,” the lobbyist said. “So you’re reducing costs that otherwise would be spent.”

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The deal is already giving deficit hawks heartburn.

Lorenzen of the Committee for a Responsible Federal Budget said that his group is worried about several provisions of the plan, including the delay of the Cadillac and Medical device taxes. He said that if delays lead to their eventual repeal, it would cause a further loss of revenue to the Treasury, which would likely be made up by still greater increases in the public debt.

He said that the deal also has negative implications for any future effort to overhaul the tax code, which according to Senate Majority Leader Mitch McConnell (R-KY) and House Speaker Paul D. Ryan (R-WI) won’t be undertaken until 2017 at the earliest.

“This lowers the bar for tax reform,” he said. “Now tax reform may appear more responsible than it actually is because we’ve lowered the baseline. The amount of revenue you would have to raise to be revenue neutral would be much lower.”