Christmas Came Early For Well-Connected Industries

With Christmas over and done with, it was a bountiful season of gifts for politically well-connected industries, courtesy of a Congress willing to give special hand-outs. In 2019, the year-end budget package included provisions for green energy, wealthy hobbyism, auto manufacturing and more. A 2020 resolution should be to write off Congress's addiction to special-interest policy handouts. 

The primary culprit in this year's budget deal were "tax extenders" - special tax breaks that are initially passed as temporary but get renewed almost indefinitely.  

Tax extenders offer a way to manipulate budgetary scorekeepers’ estimates of the nation’s fiscal health. In other words, they offer Congress a way to offer tax breaks while minimizing their nominal budgetary impact. 

Scorekeepers like the Congressional Budget Office (CBO) are required by law to credulously assume that “current law” will continue indefinitely. That means that when the CBO prepares estimates the fiscal impact of legislation using the standard ten-year budget window, a tax break that is technically set to expire at the end of each year appears to be less impactful than a tax break that is set to continue indefinitely.  

That’s true even if, in practice, Congress simply extends nearly all of these “expiring” provisions at the end of each year, which is what routinely happens. 

Industries affected by the extenders often argue that they rely on the tax credits included in these extenders packages. Yet while Congress generally extends most tax breaks included in extenders packages, the transient nature of these provisions means that businesses cannot actually count on tax breaks relevant to their industries being in the tax code over the long term.  

That matters a great deal, because the ostensible raison d’etre for many of the tax breaks in extenders packages is to encourage investment. But if businesses can’t count on those tax breaks being there next year, it’s risky at best to factor them in to investment decisions. Most companies simply don’t.

And just as businesses can’t count on extenders currently enshrined in the tax code remaining there, they also cannot be sure that extenders that are allowed to expire will remain expired. Tax extenders that do slip through the cracks have a habit of coming back from the dead. Many of the tax breaks included in this year’s deal reestablish previously-expired tax breaks not only for 2019 and 2020, but also retroactively for 2018. 

Retroactive tax policy is generally a bad idea for a fairly obvious reason: businesses can’t change the investment decisions they already made. Tax breaks established retroactively are a nice bonus for the businesses receiving them, but they don’t encourage future investment or economic growth.

Not every tax break included in extenders packages is necessarily bad policy. Some extenders, such as those working to move capital investment closer to full expensing, are smart policy. Extenders that make good policy sense on their own merit should simply be enshrined in the tax code permanently.

Tax extenders are a bad policy mechanism that distort policies’ impacts and reward well-connected industries. Moving forward, Congress should get its act together and make permanent the good policies while letting misguided provisions expire once and for all.