Congress’s to-do list continues to grow as it looks to the final quarter of the calendar year. There will be debates about a new trade deal with Mexico and Canada, government funding levels, health care reforms, among others. One of the most urgent items on the list is the handling of so-called “tax extenders”: tax provisions that regularly expire and are extended by Congress for short time frames. As policymakers debate how to handle this list of more than 40 tax provisions, they should remember that not all tax extenders are created equal.
One of the core principles of good tax policy is that tax codes should be stable; taxes should be permanent so individuals and businesses can plan their affairs. Unfortunately, Congress frequently ignores that idea, largely to take advantage of budget scoring. Cutting a tax or creating a tax credit for one or two years is surely less expensive than doing it permanently.
This process means that Congress must frequently reevaluate its handiwork. Should these provisions be extended?
While many extenders are derided for helping well-connected industries through favorable tax treatment, some of the provisions actually move toward better tax policy.
For example, five provisions deal with the topic of full expensing or “cost recovery.” The U.S. corporate income tax unfairly taxes businesses that make capital investments. These provisions try to correct that mistake by limiting the tax bias. The Tax Cuts and Jobs Act helped here too, but it’s also not a permanent part of the U.S. tax code. Helping ensure that firms are not improperly taxed is a reasonable step.
Other provisions limit the impact of improperly structured taxes, like the medical device tax. This tax would assess a charge on the gross price of every medical device sold in the U.S. raising the prices of pacemakers, canes, and other number of medical necessities. The tax was only in effect in 2013 and 2014 but resulted in less research and development spending. In another case, Congress must debate how to handle a temporary decrease in the alcohol excise tax rate. Here again, the lower rate should be permanent, but extending the lower tax rate is surely better than letting it expire completely.
Now, at the same time, some of these provisions are not ideal. Many of the extenders involve subsidies for energy projects, such as credits for biofuel, biodiesel, and electric vehicles. These industries should not be penalized by the U.S. tax code, but they shouldn’t get a leg up either.
Congress has its work cut out for it. Tax provisions that expired in 2017 and 2018 still must be handled, and the list of provisions that expire in 2019 is long too. Spending the time to go through the list with a fine-tooth comb is a worthwhile exercise, however.
Tackling tax policy in an ad-hoc fashion isn’t ideal. Permanence is necessary in the tax code, but Congress must also balance these first principles with consideration for tax provisions themselves, for not all extenders are created equal.