Economy & Budget

Tax extenders on the road to tax reform

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President Obama on Friday signed into law a package of tax extenders costing $622 billion over the next decade.

News stories and congressional tax writing committee chairmen heralded the tax extenders legislation as a step forward for tax reform. Is this just more wishful thinking, or more? Think about getting to tax reform as a marathon. Some miles you’re ahead; other times, you fall back, but there are still miles to go. The tax extenders package gets you closer to the finish for these reasons

The end of tax extenders?

In years past, lawmakers bickered up until the last minute over what to do over the tax extenders. Important individual and business tax breaks were lumped together with special interest favors to create an ugly tax stew bubbling over each year. In the end, lawmakers picked and chose winners and losers, kicked the can down the road, held their nose, vote and then went home for the holidays.

{mosads}This year, 52 tax provisions that have expired have either been temporarily extended or made permanent. Almost two dozen are made permanent, including six for families and individuals. The R&D Tax Credit and Section 179 Expensing for Capital Investment, important for business, are extended indefinitely. Then there are the special interest projects that everyone loves to bash: NASCAR, horse racing, and film and television productions are all seeing a one-year extension.

The annual uncertainty of the extender is a nightmare that keeps things constantly in the air. As the saying goes, “it is no way to run a railroad.” Today doesn’t necessarily mean the end of the road for tax extenders. But it is indeed a major departure from the Ghost of Christmas past, providing greater long-term certainty. “How can families and local businesses count on tax relief each year as long as Congress can’t decide what’s permanent and what’s not? That confusion ends with this bill,” said House Ways and Means Chairman Kevin Brady (R-Texas).

The breakthrough of “temporary permanence”

The tax extender package is setting the stage for comprehensive tax reform in one archaic way. “Revenue scoring” and “budget baselines” may be inside-the-Beltway concepts, but they can make or break tax reform. By law, Congress is required to score the revenue loss or gain to the U.S. Treasury of specific provisions in play in tax reform. If all 52 expiring provisions were allowed to expire, the congressional budget baseline would be $600 billion more in revenue. Tax reform would have to find that amount of money to “pay for” tax provisions that good tax policy requires and for popular provisions needed politically to get tax reform done. “Temporary permanence,” a term coined by James Carter, vice president of government affairs at Emerson and a contributor to The Hill, captures what happened this year. The tax extenders this year were made permanent temporarily to make it easier to get tax reform.

Bipartisan tax policy

Talk is cheap; commitment is priceless. What comes forth in statements from the congressional tax leadership demonstrates true bipartisanship, which is uncommon in today’s political environment and in the presidential election season; actually successful legislating, rather than just the proposing of it; and realization that the extender bill is just an interim step to full tax reform.

Senate Finance Committee Chairman Orrin Hatch (R-Utah) said: “After years of short-term extensions, good faith bipartisan compromise prevailed.” Sen. Ron Wyden (D-Ore.), the senior Democrat on the committee, added: “Now is not the time for Congress to slow down and pat itself on the back. Today is a down payment on tax reform and our work continues as we strive towards a complete overhaul of our broken tax system.”

Does this mean we are even at the halfway point in the marathon for tax reform? No one knows. But there is a lot of tailwind behind us and we have committed runners who can go the distance. Recall that former Speaker John Boehner (R-Ohio) gave a cold shoulder to the last tax reform bill, unlike current Speaker Paul Ryan (R-Wis.), who said this about the tax extender package: “I think this is one of the biggest steps toward a rewrite of our tax code that we have made in many years, and it will help us start a pro-growth bold tax reform agenda in 2016.”

Tax reform 

In the Tax Reform Act of 1986, the last major tax overhaul, the deal that had to be struck for comprehensive tax reform was clear-cut: Democrats wanted tax loopholes closed and Republicans wanted rates lowered. Today’s extender deal was similarly transparent. Democrats wanted to strengthen and make permanent the Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit. Republicans wanted to expand measures — the R&D Tax Credit and Section 179 Expensing for Capital Investment — that foster a favorable business climate and stimulate growth. Bipartisanship, the tenacity and compromises made last week could be the road map in 2017 for the first 100 days of the new president and new Congress when the president has his maximum political capital and Congress is inclined to follow presidential leadership. (As I noted previously in The Hill in “What will the candidates do in their first 100 days?“)

Wishful optimism? Does the tax extenders bill of 2016 have bearing on the possibility of tax reform? Yes. It increases the odds for the tax reform marathoner crossing the finish line.

This piece has been revised to correctly attribute a referenced term.

Bloomfield is president and CEO of the American Council for Capital Formaiotn and was  secretary of President Reagan’s Transition Task Force on Tax Policy. Follow him on Twitter @MrCapitalGains.

Tags Kevin Brady Orrin Hatch R&D Tax Credit Ron Wyden Tax Tax extenders Tax reform

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