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Issue brief
May 28, 2003
 

Sunsets Hide More Than Half of the Revenue Loss From Recent Tax Cuts

Since January 2001, Congress has enacted three tax cut packages with an official cost of $1.3 trillion over the current 10-year budget window (FY2004-2013). However, all of these tax cuts come with “sunsets” that assume an expiration date at various times between 2004 and 2010 even though tax cut proponents fully intend for them to be permanent. If the sunsets are removed then the estimated revenue loss swells by nearly $1.8 trillion for a 10-year total cost of $3.1 trillion. In other words, official estimates of the tax cuts enacted since January 2001 recognize less than half of the potential revenue loss. What remains is a hidden cost, most of which is likely to come due but none of which is officially acknowledged.

Tax Cuts Since January 2001 - Official Estimates and Hidden Revenue Loss
Fiscal Years 2004-2013
 

 Sources: Congressional Budget Office, “Sunsets in the Tax Code,” William Gale and Peter Orszag, May 23, 2003

Even the calculation above slightly understates the hidden revenue loss over the next 10 years because it does not include another $180 billion of previously enacted tax provisions that also contain sunsets. These provisions are often referred to as “extenders” because Congress routinely extends them when the sun is about to set. The largest of the extenders is the research and experimentation tax credit, which is scheduled to sunset in 2004 and will cost $56 billion through 2013 to renew. Assuming that all of these provisions are extended brings the sunset-free tax cut total to $3.3 trillion. Interest on the increased debt from removing the sunsets would cost another $350-$400 billion.

Hiding the full cost of legislation for either tax cuts or new spending is no way to keep the nation's books. Would it be credible, for example, if Congress and the President decided to provide full prescription drug coverage for Medicare beneficiaries and keep the cost to an “affordable” $400 billion by sunsetting it within two years? Obviously, not. But what works to get tax cuts enacted might also be used as a free lunch method of expanding entitlements.

It is a measure of how far fiscal discipline has slipped that Congress would employ such blatant budgetary gimmicks, especially in the wake of recent corporate accounting scandals. These sunsets confuse the fiscal outlook by overstating likely revenues and at the same time complicate the tax code. Worst of all, they cynically avoid facing up to the fiscal consequences of today's decisions, leaving future Congresses to clean up the mess. Roughly three-quarters of the hidden revenue loss from tax cut sunsets occurs after 2008, in the second five years of the 10-year outlook. This is also the period when the first of the huge Baby Boom generation will qualify for Social Security and Medicare, signaling the onset of a demographic transformation that will put enormous pressure on the federal budget. No accounting gimmick will be able to deal with or delay that formidable challenge.

Cost of Repealing Sunsets[2]
 

The sunsets serve only one useful purpose – they act as potential “triggers.” At some point, the cliff effect of these sunsets will have to be addressed, particularly the $610 billion sunset that occurs on December 31, 2010. That is the date on which all provisions of the big 2001 tax cut package are set to expire. As events unfold and we see whether future deficits are as modest and manageable as the Administration hopes, it may make sense to adjust fiscal policy accordingly - perhaps removing some of the sunsets and allowing others to take effect. For that reason, it would not be a good idea to simply remove all sunsets at this time. Although the sunsets were not designed to be taken seriously, fiscal responsibility may ultimately require that result. However, if Congress chooses to maintain the sunsets it should ensure that new policies be assessed against a baseline that accounts for the tax cuts as if the sunset provisions didn't exist. The fiction that sunsets will take place as planned should not be indulged to justify new initiatives.

A popular rationale for tax cuts is, “it's your money.” True enough. But because these tax cuts are deficit-financed, it must be pointed out that “it's your debt” as well. With deficits back for as far as the eye can see, it's time to get back to the pay-as-you-go principle that was so useful in constraining the growth of deficits in the 1990s. What's needed is a new bipartisan agreement on a fiscal framework for eventually getting back to a balanced budget. Permanent extension of tax cuts should take place only within that context.