Tax Breaks Suddenly Fair Game for Budget Slashers
Policy + Politics

Tax Breaks Suddenly Fair Game for Budget Slashers

Jerry Koch/iStockphoto

Grover Norquist, the leader of Americans for Tax Reform and one of the most feared anti-tax lobbyists in Washington, caused a stir last week by acknowledging for the first time that allowing the massive Bush era tax cuts to expire next year “technically” doesn’t constitute raising taxes

If those 2001 and 2003 Bush tax cuts were allowed to expire next year, the Treasury would reap an estimated $4 trillion in fresh revenues in the coming decade – a  chunk of change that would go a long way towards reducing and stabilizing the federal deficit.

Also,  if another provision providing Alternative Minimum Tax relief to more than 25 million Americans  were allowed to expire as well, that would  boost government revenues by an additional $136 billion over the coming decade, according to the congressional  Joint Committee on Taxation. And another $68.1 billion would flow into the government coffers through 2020 once the temporary estate tax relief provision expires.

But beyond these few biggies, there are hundreds of other lesser known temporary tax provisions set to expire in the next few years that will cost about $760 billion—more than the annual budget of the Defense Department-- over the coming decade, assuming they are renewed by Congress, a Congressional Budget Office study shows. Just last year, Congress and the administration renewed 51 of those tax provisions at a cost of $55.3 billion through 2020,  according to congressional Joint Tax Committee estimates.

These so-called “tax expenditures” are narrowly targeted, special-interest breaks -- ranging from Research and Experimentation credits and energy and fuel efficiency incentives to Indian employment tax credits – that expire each year and must be renewed..

One example: The government subsidizes the Puerto Rican and Virgin Islands rum industry to the tune of $235 million a year.  The so-called rum “cover over” program launched in 1917, provides  Puerto Rican and Virgin Island  rum producers with  rebates for the excise taxes slapped on their products in the United States.

The 51 provisions renewed last December were part of a major agreement between President Obama and congressional leaders to extend the Bush tax cuts to all taxpayers for two more years. “This bill helps our economy grow by investing in our infrastructure and cutting taxes for employers,” Senate Finance Committee Chairman Max Baucus, D-Mont., said at the time.

Congress routinely reauthorizes these tax breaks which have increased  seven-fold since the mid-1980s, with many of them of dubious value, according to critics. Many of these provisions were approved temporarily either to hide their long term costs or because they were highly experimental and might not prove effective, according to tax experts.  And because they are scored by the Joint Tax Committee as “tax cuts,” in some instances lawmakers must approve offsetting tax increases or spending cuts.

“Over time, Congress keeps enacting these provisions, and to play games with the revenue score, they pass them and have them expire and figure there will be a sufficient evidence or constituency later on to come to the defense of the provision and make sure it stays in the law,” J.D. Foster, a senior fellow in economics at the conservative Heritage Foundation, told the Fiscal Times. “We’ve got such a long list that it’s very hard for Congress to take the time – unless they’re willing to put a lot of work into it, to sort through them one at a time and decide which are good, which should be kept . . .  and which should be abandoned altogether.”

But as Congress and the White House seek savings as part of a major deficit-reduction plan, the extenders may invite closer scrutiny. And by telling the Washington Post editorial board  this week that “not continuing a tax cut is not technically a tax increase” and wouldn’t violate lawmakers’ no-new-taxes pledges,  Norquist may have inadvertently opened the door to some Republicans backing measures to raise revenues by simply allowing tax breaks to expire.

While taken together the expiring tax provisions represent a small part of the government’s overall revenue problem, in the tough game of deficit reduction, every billion or so helps. 

The grand daddy of all extenders is the  Research and Experimentation  credit, which was created in the Economic Recovery Act of 1981 as a temporary measure to bolster U.S. companies’ competitive standing by slashing companies’ after-tax costs.  Since then, it has been extended and modified 14 times, beginning with the  1986 Tax Reform Act  under President Ronald Reagan.  Though businesses could originally claim a 25 percent nonrefundable credit equivalent to 20 percent of qualified research expenses above a base amount, the credit currently is 20 percent.

The credit, better known as Research & Development, is set to expire at the end of this year.  But with so much backing from industry, the popular measure is certain to be extended again, at a cost to the Treasury of $13.2 billion over the coming decade, according to an estimate of the Joint Committee on Taxation.  

The research credit was one of about  seven tax extenders back in the mid-1980s, with a modest overall cost to the Treasury. Now, there are 51 tax provisions, with important budgetary implications.

“The list is so long now it’s kind of oppressive,” said Foster of the Heritage Foundation.

Here are some of the more controversial extender provisions, and their projected costs through 2020:  For the latest complete list, please see CBO's Cost Estimate.