October 21, 2014

Kill the Extenders!

Debate on the so-called “extenders” bill has focused on the size and duration of unemployment benefits, health insurance assistance for those who recently lost their jobs, Medicare physician payments, state aid for health care and various offsets to mitigate the overall effect on the deficit.

Conspicuously missing from the debate is any scrutiny of the extenders themselves. It’s a missed opportunity to raise needed revenue while simplifying the tax code and broadening the tax base -- goals that economists of all ideological stripes have long advocated. 

Both the House and Senate versions of the extenders bill contain more than 60 narrowly targeted tax breaks that expired last year. Extending them just through this year will cost about $32 billion. The long-term cost runs to over $350 billion. That cost will add to the debt unless it is offset by corresponding tax increases or spending cuts that may prove more harmful to the economy than failing to renew some, or all, of the extenders. 

At a time when the President is commendably urging all federal agencies to identify their lowest priority and least effective items, Congress should devote the same level of scrutiny to the tax code. The extenders would be a good place to start.

To begin with, there is little to distinguish these tax breaks from spending programs. Indeed, they are often referred to as “tax expenditures.” The credits, deductions and exclusions they provide are, for the most part, disguised federal subsidies designed to encourage certain behavior.

Many economists argue that it would be more efficient and transparent to provide these subsidies directly by writing a check rather than indirectly by funneling them through the tax code. However, the direct approach is unpopular with legislators and lobbyists because it would blow their political cover. The extenders might then be seen as “special interest” spending programs instead of “pro-business” tax cuts. And, as we are now seeing in the reaction to spending increases on state aid and unemployment benefits, depriving the extenders of their tax-cut disguise would subject them to far more scrutiny.

Group packaging, as in the current bills, is another way in which the extenders escape scrutiny. As explained in a recent report by the Congressional Research Service (CRS):

The temporary nature of extenders can be considered useful as it allows policymakers to evaluate the effectiveness of provisions on a regular basis. If an extender is found to be ineffective, its scheduled expiration allows several policymaking options, including allowing the provision to expire or redesigning the provision to improve its use as a policy tool. However, policymakers have, for the most part, considered the extenders as a group during the enactment process, and have not reviewed the unique strengths and weaknesses of specific provisions.

While the temporary nature of extenders isn’t routinely used as an opportunity for oversight, it is routinely used as an opportunity for fund raising. Legislators seeking special interest campaign contributions and lobbyists seeking to bill their clients have a mutual interest in keeping alive the annual scramble to ensure that favored provisions are extended for one more year -- and the next year, and the next.

Beyond economic efficiency and political cover there are more fundamental questions. Do the extenders really accomplish their goals and are those goals worth the cost? No one really knows because no one ever asks.

The only question that comes up with regard to the extenders is how they can be offset to comply with the pay-as-you-go law. That’s an important consideration -- it is certainly better to have paid for waste than unpaid for waste -- but it ignores the question of whether the extenders are wasteful to begin with. 

As Congress is forced to dig deeper into its bag of tricks to pay for the extenders, this exercise is prompting even some in the business community to ask whether the extenders are really worth the trouble. For example, the current bills use almost $60 billion of permanent tax increases to cover just a one-year extension of the extenders. It will require even deeper offsets in the years ahead.

Before going through this painful exercise, it would be best to look more closely at the extenders. While most of them have a laudable purpose, such as encouraging investments in new technologies or in economically distressed areas, Congress has not taken the time to examine whether they have been successful enough to justify raising taxes elsewhere or cutting other spending programs.

So let’s just pull the plug on this annual charade. If everything is truly on the table for purposes of improving our long-term fiscal outlook, then it’s time to end the free pass for the extenders. None of them should be renewed without careful scrutiny and a clear justification. But now that they have expired, the best decision may simply be: Do not resuscitate.