Politics

GOP Tax Overhaul May Bring Back Extenders

Party admits making some tax deductions permanent could be too costly

House Ways and Means Chairman Kevin Brady once spoke of making tax extenders permanent, but that may no longer be the case. (Bill Clark/CQ Roll Call file photo)

Certainty is a word Republicans used repeatedly in 2015 to make the case for permanently renewing dozens of temporary tax incentives known as extenders.

Now, that term has all but disappeared from the GOP vernacular as the party seeks to overhaul the tax code for the first time since 1986.

When the House Ways and Means Committee releases its tax bill Wednesday, it will include some temporary provisions that could effectively create a new batch of tax extenders that may or may not be made permanent in the future.

While Republicans acknowledge this is bad policy because taxpayers and businesses can’t plan for long-term investments, they say it’s a necessity since making some tax cuts and deductions permanent is costly.

In advocating for the 2015 measure — ironically called the PATH Act, an acronym meant to signal a pivot to the tax overhaul bill the committee is now drafting — Ways and Means Chairman Kevin Brady promised that making most of the tax extenders permanent would provide taxpayers “predictability, clarity and certainty.”

“How can families and local businesses count on tax relief each year as long as Congress can’t decide what’s permanent and what’s not?” the Texas Republican said at the time. “That confusion ends with this bill.”

Turns out it doesn’t.

“Our whole intention was to make this permanent so we wouldn’t have to go through that again,” said Texas GOP Rep. Kenny Marchant, a Ways and Means member. “That seems to have gone by the way.”

The temporary provisions that came to be known as extenders drew their name because Congress would keep them alive through short-term extensions, often retroactive renewals lasting for two years at a time. Most of those renewals were unpaid for or only partially offset.

A new batch of tax extenders could suffer the same fate for the same reason the previous ones did — the high cost of permanency. 

“Too many people were afraid, ‘My gosh, it will blow up the budget deficit,’” said House Budget member Tom Cole, an Oklahoma Republican. “I actually think we made a step in the right direction by recognizing, ‘Well, we do these every year. We’re not getting rid of these.’”

Reconciliation rules

The primary reason Republicans are creating the new temporary policy is because they plan to advance their tax bill using the fast-track rules of reconciliation to avoid a Democratic filibuster in the Senate. Under those rules, any provision estimated to lose money outside the 10-year budget window that is not offset through other revenue raisers must sunset, or end, after that first decade.

Knowing this, tax writers are putting expiration dates on certain costly provisions. For example, a proposal to allow businesses to immediately write off the full cost of capital expenses is expected to sunset after five years.

Tax writers have not said which provisions will expire when, noting last week that decisions were still being made with cost in mind.

“Overall, it’s going to be because of the bean counters and score space, what has to be temporary and permanent,” said New York Republican Tom Reed, another tax writer.

The score is the official revenue estimate from the Joint Committee on Taxation that will determine whether the tax bill complies with the reconciliation rules.

Because those rules say the tax rate cuts the GOP has promised cannot add to the deficit if they are to be made permanent, Republicans have been scrambling to find offsets, mostly in the form of eliminating so-called tax loopholes.

But what is a loophole to one lawmaker is an incentive to another. The deduction for state and local taxes is one example.

Brady and GOP leaders had hoped to repeal it in full, arguing that it’s a subsidy to states that can’t control their finances. But members from high-tax states like New York and New Jersey have threatened to sink the tax bill over a deduction they see as a fair break since their states contribute a higher proportion of federal tax revenues.

Tax writers acknowledge that a compromise would be necessary, but that means they will lose a chunk of the estimated $1.3 trillion to $1.8 trillion that a full repeal is estimated to raise. Making up for that loss could mean more temporary provisions.

“We’ll be balancing temporary, permanent with how far we go with some of the reforms,” said Kansas GOP Rep. Lynn Jenkins, a Ways and Means member. “But the reality is you have to make it work.”

Cliff effect

The situation is not ideal, Ways and Means member Carlos Curbelo said, citing the committee’s initial plans for a permanent, revenue-neutral tax overhaul.

“It just doesn’t seem like that’s going to be achievable, so you will see a lot of temporary provisions with the hope that they will be extended,” the Florida Republican said.

Since hope is difficult to bank on, tax writers are expected to make some popular provisions temporary, figuring the chances are higher that they’ll be extended down the road.

Reed likened the situation to facing a cliff that you know you can’t fall off.

“You’re kind of thinking, ‘That will be taken care of down the road because no sane politician will allow that cliff to take effect,’” he said. “And then there will be other [times] where, OK, maybe you go over the cliff and you fix it. That’s the nature of this problem.”

Other provisions that tax writers want to phase out will be made temporary on purpose, Reed said. As an example, he pointed to tax credits for wind and solar projects that the PATH Act, the 2015 extenders bill, set to wind down through 2019.

Lobbying boom

Thousands of K Street consultants could find a regular business boom with a batch of new extenders, but most lobbyists say that’s not at all what their clients are aiming for in this year’s debate.

The nation’s businesses want permanent changes, not the uncertainty that comes with being at the mercy of a future Congress for extensions. But most say they’d opt for the extenders over nothing at all.

“Well, obviously, certainty is the best situation because then businesses can plan,” said Mary Burke Baker, a lobbyist with K&L Gates and a former Senate Finance staffer.

“Even if you think [it’s] likely some of these things will become new extenders, you can’t plan that they’re going to be extended,” she added. “If you create a bunch of new extenders, how do you pay for them? It’s difficult enough to pay for the extenders now.”

Some lobbyists said lawmakers might arrive at legislation that makes much of the business provisions permanent, while making some popular tax perks for middle-income individuals only temporary.

“There will be a blend of those things they think they can do permanent and those things just to get the job done on a 10-year window,” said former New York Republican Rep. Thomas M. Reynolds, now with Holland & Knight.

Given that certainty, even if Republicans pass their tax overhaul, “the tax lobbying world is going to be alive and well” for years to come, one longtime lobbyist said.

Kate Ackley contributed to this report.

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