At a time when working families are struggling harder than ever to make ends meet but corporate profits are soaring to record highs, Congress might pile on even more tax breaks for businesses. At issue is the extension of a package of temporary tax provisions—known as the “tax extenders”—that expired at the end of 2013. The tax extenders package is a mixed bag of tax relief for both individuals and businesses; some provisions support energy efficiency, renewable energy, teachers, and struggling homeowners, while other provisions primarily benefit multinational corporations.
Earlier reports indicated that Congress was considering a plan that would cherry-pick some of the expiring provisions and make them permanent—primarily the major business tax cuts—while extending the rest for two years and phasing out a provision that supports wind energy. The permanent business tax cuts would have primarily benefited those at the top, such as big shareholders who indirectly pay a large portion of corporate income taxes. More recently, the House passed a one-year extension of the entire tax extenders package instead, which may become the ultimate result. While this is not an ideal solution, it is far preferable to the earlier package that included permanent business extensions. That earlier package would have been yet another example of Congress spending billions on the wealthy few instead of building an economy that works for everyone.
Congress appears to be looking at the extender package without asking how the provisions fit within the context of the U.S. tax system or the economy as a whole. Currently, an enormous volume of tax breaks, loopholes, and subsidies are heavily skewed toward the wealthy few, which reduces the overall progressivity of the system. The earlier plan on tax extenders only made this worse. Under that plan, two of the largest permanent provisions would be for business: an expanded research and development tax credit and Section 179 expensing to allow businesses to accelerate their tax deductions for major capital expenses. These two provisions alone would have cost $229 billion over the next 10 years. The Congressional Budget Office, or CBO, estimates that the top 1 percent pays 48.7 percent of the corporate income tax, so most of the benefit of a business tax cut would likely flow to the wealthy as well.
Instead, Congress should focus on helping struggling families who are slipping out of the middle class. If Congress wants to make temporary tax provisions permanent, the best place to start is critical changes to two tax measures that have been responsible for giving millions of working families a shot at entering the middle class: the Earned Income Tax Credit, or EITC, and the Child Tax Credit, or CTC. Congress expanded these two credits in 2009, but those expansions are scheduled to expire at the end of 2017, which will raise taxes on 50 million Americans. According to the Center on Budget and Policy Priorities, allowing the EITC and CTC expansions to expire would raise taxes by $2,492 for a married couple with three children making $20,000 per year. Permanent extension of these provisions would not only be fair, but also would make good economic sense: The EITC encourages people to work and earn more, while the CTC helps working parents give their children a productive start. Since both provisions are limited to families who need them most, they are an efficient way to increase economic demand.
Phasing out the production tax credit for wind energy also falls short on fairness and efficiency grounds when viewed in the context of a tax code that includes billions of dollars in permanent tax breaksfor the oil and gas industry—a mature industry that is incredibly profitable. At the same time, the one-year extension Congress is now considering would make the production tax credit available only to wind projects that start construction by the end of this month, and that is insufficient time to induce significant renewable energy activity. It is also poor planning, given that states likely will want to increase their use of renewable energy under the Environmental Protection Agency’s Clean Power Plan proposal.
The tax extenders debate looks even worse when compared to other instances in which Congress ignored struggling families. Earlier this year, Congress refused to extend jobless benefits for the long-term unemployed; extending these benefits would have cost $17 billion. Permanently extending the expanded research tax credit and the business expensing rules, as proposed in the earlier tax extender deal, would cost 13 times more. Even the one-year tax extenders deal would cost $41.6 billion, more than twice the cost of extending long-term unemployment insurance.
The budget deficit has fallen dramatically in recent years, but long-term fiscal challenges remain. Congress should enact temporary measures to support economic recovery, such as extended unemployment insurance, but generally should avoid permanent legislation that weakens the nation’s long-term fiscal position. Particularly as the population ages, the federal government will need more revenue to sustain foundational programs such as Social Security, Medicare, and Medicaid.
Congress will need to make a decision on the tax extenders during the lame-duck session in order to ensure a smooth tax-filing season for 2014 returns. Earlier this year, the Senate Finance Committee reported a bill that would provide a temporary two-year extension of all the tax extender provisions that expired at the end of 2013. Sticking with a temporary extension may be the best possible outcome from this Congress, especially since early reports of a potential deal on tax extenders show just how much Congress has forgotten about fairness and efficiency.
Alexandra Thornton is the Director of Tax Policy on the Economic Policy team at the Center for American Progress. Harry Stein is the Associate Director of Fiscal Policy at the Center.