A Season of Tradition
From November to the New Year (and sometimes past it) is a time filled with tradition, familiar faces, the same old stories being told once again, and often, even in the nation’s Capitol, a sense that we are all in this together.
No, not Thanksgiving, nor New Year’s Eve, Christmas nor Hanukkah—it is tax extenders season!
“Tax extenders” refer to the now 55 tax breaks that will expire at the end of the year, which are usually packaged together into one piece of legislation. These are changes to the tax code that for whatever reason are not made permanent and hence expire periodically, often annually. Some of them are far reaching, such as the research and experimentation tax credit, or the tax deduction allowed to those who live in income or sales tax states. Others are much narrower, such as tax credits for certain industries. But they all share the fact that they keep expiring year after year.
In theory, the purpose of tax credits is to encourage additional activity in a particular area, above and beyond what would have occurred without the tax credit. And in theory, some deductions reduce taxable income to adjust for the impact of the federal tax code on certain individuals.
Few would argue that the ongoing cycle of tax adjustments, which are extended and then allowed to expire or be re-implemented retroactively, is a good way to run a tax system. Tax breaks designed to help “level a playing field,” or to encourage activity, do neither when the break is uncertain or routinely reinstated after it has expired. And a tax code that is written to favor some over others is far from optimal in the first place. So we end up with a suboptimal tax code that does not even serve its purpose.
This annual “Festival of the Tax Extender” needs to end. Either make such breaks part of the permanent code or drop them. Ideally we would have a tax code that didn’t need to include such tricks, but real tax reform that seeks a simple, transparent, neutral, territorial and globally competitive code. Because of its tremendous potential to stimulate real long-term economic growth, tax reform should be a top priority of policymakers.