- President Obama is prepared to veto a bipartisan package of business tax breaks that House and Senate negotiators are close to finalizing.
- The deal would make several corporate tax breaks permanent without offsetting the cost in any way, while failing to extend provisions of the Child Tax Credit and Earned Income Tax Credit that are favorable to low-income households.
- In a statement, Treasury Secretary Jack Lew described the proposal as “fiscally irresponsible” and said “any deal on tax extenders must ensure that the economic benefits are broadly shared.”
The tax extender impasse
The origin of the fight is a package of 55 or 56 (we’ll return to that in a moment) corporate income tax breaks that at one time or another were inserted into the tax code as temporary provisions. Typically these breaks were made temporary so as to reduce their notional cost in CBO scores, rather than because their proponents actually wanted them to be temporary. Consequently, extension of the tax breaks upon expiration became routine — hence the name “tax extenders.”
Keeping the breaks temporary rather than making them permanent was a convenient way to mask the cost. It also required a continual merry-go-round of lobbying over their extension, which served members of Congress’ purposes well. The tax breaks have traditionally enjoyed bipartisan support, since a few of the larger ones serve as a subsidy for renewable energy production and because the Research & Development tax credit is pretty broadly believed to be good public policy.
In addition to the 55 traditional tax extenders, there is the “bonus depreciation” tax cut. This lets companies take a larger tax writeoff for investment expenses than would otherwise be possible. It was introduced as a recession-fighting temporary measure that really was supposed to be temporary, but the businesses who profit off it would like it to stay permanent.
Back about a year ago, something unusual happened and congress didn’t extend the tax extenders. But all year the expectation on K Street and in corporate America has been that the extenders will be retroactively extended at the end of 2014.
Working class tax cuts
Joining the party in 2009 were two provisions of the American Recovery and Reinvestment Act (aka, “the stimulus”) that made the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) more generous to low-income working families on a temporary basis. As part of the 2012 fiscal cliff deal, Democrats extended these tax cuts out to the end of 2016.
Democrats would like these measures to be made permanent. Indeed, most Democrats and some Republicans agree that the EITC should actually be made even more generous. But there is no agreement as to how to offset any proposed enhancements in the EITC.
What everyone’s bargaining for
There are two aspects to the ongoing negotiations, which are somewhat in tension with one another. On the one hand, more liberal members would like to minimize the fiscal burden of the tax extenders by extending them for a limited period of time and by excluding bonus depreciation. On the other hand, more liberal members would like to see the EITC and CTC breaks extended, which would increase the fiscal cost.
Conversely, Republicans are aiming to maximize the volume of business tax breaks while minimizing the volume of assistance to the working poor. A deal to make the extenders permanent while doing nothing on EITC/CTC would accomplish exactly none of liberals’ goals, thus the negative take from the White House. But Democratic Senators involved in the deal argue that the administration and liberal critics in their own caucus aren’t thinking realistically about the consequences of failure to reach a deal. They fear a massive backlash from the business community (including elements that are sympathetic to Democrats) without any substantial interest from the mass public that could be leveraged in their favor.
