Dec 03, 2014 - 2:15pm

Expiring Tax Extenders is a Tax Hike

Former Senior Vice President, Economic Policy Division, and Former Chief Economist

In the 2000s Washington politicians would wring their hands over $300 billion budget deficits.  Well, the federal government recently ran deficits exceeding a trillion for five straight years, and it produced barely a yawn as the national debt soared to $13 trillion.  Odd, isn’t it?

The deficit has now come down to $486 billion, or roughly twice the level that caused so much consternation a decade ago, and the decline is merely a temporary respite.  The Congressional Budget Office projects the deficit to march back toward a trillion over the next decade as the national debt reaches past $20 trillion.  Houston, we still have a problem.   A fiscal policy intervention is long past due.

As with any intervention, step one is to admit we have a problem.  Step two is to be honest about the solutions, all of which center on one of three axis – reducing the growth rate of spending, a stronger economy to generate more revenues organically, and explicit tax hikes to generate more revenues.

Washington’s propensity for running budget deficits has spawned a panoply of professional deficit worriers, and thankfully so.  Absent their prodding and pleading, the ease with which Washington runs budget deficits might go unchecked altogether until the financiers of this irresponsibility – the buyers of federal debt – finally cry uncle, with painful consequences for all of us. 

Yet sometimes the worriers’ proddings are themselves a tad skewed.  Such is the case, for example, with a recent analysis by Maya MacGuineas of the Center for a Responsible Federal Budget.  The issue at hand involves the so-called tax extenders, a group of tax provisions that have or are about to expire.   Many of these provisions have been in the law for decades, repeatedly expiring and then being extended by the Congress more or less in the knick of time. 

From every reasonable perspective, including most especially that of the taxpayers affected, these provisions are part of the permanent law and letting them expire is a tax hike.  If this fiscal mini-drama sounds familiar, the nation repeatedly went through a similar budgetary mind-bender some years ago regarding the extension of the temporary Alternative Minimum Tax “patch”.  Eventually, almost all involved came to understand that taxpayers regarded the patch as permanent law and would be quite put out if it expired.  Most came to understand that arguing for a “pay for” to offset the cost of extending the “patch” was just a call for a tax hike in disguise. 

Unfortunately, Congress can’t seem to just make those expired or expiring provisions it likes permanent and allow insufficiently meritorious provisions to expire.  The House argued for this approach, but the Senate likes the old-fashioned ways and so Congress is set once again to engage its most practiced of annual rites, the kicking of the can.

Allowing tax extenders to expire is a tax hike.  That’s not to argue one way or the other for any particular provision.  Rather, it is a simple statement of fiscal reality.  Yet MacGuineas argues that if the tax extenders are extended and the budgetary effect is not offset with some other tax hike or spending reduction, then the nation’s debt would increase.  In short, her position is that if we do not raise taxes, then the already worrisome national debt will be higher.

On its face, one can hardly fault MacGuineas’s observation about tax hikes and the debt.  Raising taxes will reduce the growth rate in the debt, all else held equal.  The problem is her argument regarding the extenders rests on the sleight of hand of pretending she’s not advocating a tax hike. 

Washington badly needs outfits like Maya’s to act as the noisy conscience for policymakers who sometimes forget that fiscal profligacy has its limits, and dangers.  But credibility is key for the conscience’s voice to be heeded.  Pretending a tax hike is anything but does not advance the mission. 

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About the Author

About the Author

Former Senior Vice President, Economic Policy Division, and Former Chief Economist

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.