clock menu more-arrow no yes

The tax extender bill, explained

Speaker of the House Paul Ryan talks to reporters following the weekly House GOP Conference meeting at the US Capitol December 16, 2015, in Washington, DC.
Speaker of the House Paul Ryan talks to reporters following the weekly House GOP Conference meeting at the US Capitol December 16, 2015, in Washington, DC.
Chip Somodevilla/Getty Images

The House of Representatives just voted on a massive package of tax breaks that are estimated to cost about $680 billion over 10 years.

The bill passed with unanimous support from Republicans as well as more than 60 Democrats — it contains some pretty interesting compromises, including some big-ticket anti-poverty tax breaks that are a huge priority for Democrats.

The tax package was negotiated together with an omnibus spending package, due for a vote Friday, which determines funding levels for different government programs through September 2016.

The omnibus bill contains more Democratic priorities, including a few tax breaks that were moved from the larger tax extender package to attract more votes. Specifically, the Cadillac tax, an Obamacare levy that would have taxed premium health care packages and which Republicans and many unions oppose, now appears in the spending bill.

Ironically, though the omnibus bill was designed to attract more Democratic votes, many Democrats are now angrily backing away from it because of the controversial inclusion of an end to the oil export ban and a provision to block regulation that would disclose secret campaign donors.

Vox’s Ezra Klein explained in a separate post how the two bills fit together and some of the compromises that are straddling the two bills.

But it’s worth taking a closer look at this tax package, both because it costs so much and because it includes several consequential policy decisions, not all of which favor Republican priorities.

The bill will make a bunch of temporary tax breaks permanent

At the very end of each year, Congress falls back on one of its most dreaded rituals: temporarily extending a whole bevy of tax breaks. That means theoretically, from year to year, the fate of certain tax breaks existing into the next year is in doubt, lending uncertainty to businesses hoping to use them. (In 2014, when the past year’s tax breaks were in doubt, Congress ended up extending them retroactively.)

In reality, most of these tax credits were reliably passing year after year — so the crafters of this bill have decided to make them permanent. There are pros and cons of this approach. One pro is that now that they're becoming permanent, people who rely on them — mostly business owners — can plan ahead without having to worry that a congressional meltdown might put their deductions in jeopardy.

The permanent status of these deductions also allows for more honest accounting. Extending each tax break means it’s only going to be counted for one year of the country’s 10-year deficit outlook, when in reality the break will probably exist for all 10 years. Now these tax breaks will properly be represented in how much debt we’re racking up.

The big con of this bill’s approach is that by making these deductions permanent without paying for them (more on that in a moment), Congress is essentially eliminating future opportunities to negotiate additional measures to pay for them by raising government revenue elsewhere.

So what’s becoming permanent?

There are a few newly permanent tax breaks that both Republicans and Democrats love — they’re like "apple pie," according to Chuck Marr, the director of federal tax policy at the Center on Budget and Policy Priorities.

  • The first is the research and experimentation credit, which allows companies to deduct costs associated with, yes, research and development. Some argue the definition of "research" may be too broad under this tax break, but there’s also evidence that the tax credit does spur more research spending. This is the most expensive of the big-ticket tax breaks, clocking in at about $130 billion over 10 years.
  • The other is a tax deduction designed specifically to benefit small businesses, known as Section 179. It allows these businesses to write off a certain amount of investment upfront, rather than deducting the cost of the investment over time, which is the norm in the tax code.

Because this is a Republican-sponsored bill, there are several newly permanent tax deductions that democrats loathe — mostly because they support large corporations.

  • The most important of these is called the "active financing exception," which has to do with foreign income. Basically, the US tax code specifies that when a US company makes "active income" abroad, that income is not subject to American taxes until it’s brought back home. Right now "active income" abroad is defined as the income a US company makes tied to a trade or a business, but that doesn’t include money made off interest — which, incidentally, is one of the ways large investment banks make a lot of their money. So this provision would include banks in that definition, allowing their foreign income to not be taxed.
  • The other major provision is called "bonus depreciation." It’s actually not a permanent tax deduction, though it’s been extended for five years, which is longer than the typical life of a tax break. Bonus depreciation allows companies of any size to write off a certain percentage of their investments upfront, with the rest being deducted from their taxes over time. Bonus depreciation was first introduced as part of the 2009 stimulus package, and its renewal is controversial. Republicans say that though it was meant to give the economy an initial boost, it should stick around because it strengthens the economy in the long term by encouraging companies to make more investments. Democrats say it’s outlived its usefulness and essentially amounts to another giveaway to rich corporations. As a compromise, it’s being extended, though the amount companies can write off immediately will be phased down, from 50 percent now to 30 percent in 2019.

As I mentioned above, there are also some really significant anti-poverty tax deductions that are becoming permanent through this bill. They’re in here because congressional Democrats and the White House made them a condition of negotiations, and Speaker Paul Ryan was not going to let his first major legislative package fall apart.

  • The child tax credit, which was also expanded as part of the stimulus bill, will now be expanded on a permanent basis — giving every low-income family a chunk of money off their taxes per child. The deduction is "refundable," which means if a family has child tax credits in excess of how much they owe in taxes, they actually get the extra money back. Some Democrats wanted the amount of the child tax credit to be indexed to inflation, meaning the dollar amount will rise at the same rate as inflation. But this fix would have added an additional $73 billion to the bill’s total price tag and wasn't universally supported by Democrats, so proponents lost that battle.
  • In parallel, the bill is also making the expanded earned income tax credit permanent. This tax deduction essentially gives low-income people a refundable tax break for working, by growing the size of the deduction as people work more, up to a certain point. That point varies based on the individual’s marital status and how many kids he or she has.)

Even so, not many Democrats will vote for the bill, because it favors deductions for large corporations over individuals and families by a ratio of about 60 percent to 40 percent.

The rest of the bill is a hodgepodge of other two- and five-year extensions on smaller tax cuts, all of which attract different constituencies. Though I won’t go into detail on what those entail, the fact that they are so minor has ensured tax policy analysts that the next go-around at tax extender negotiations will be much smoother.

Neither party really cares about the deficit — as long as they get their way on more immediate priorities

Though Democrats overwhelmingly refused to vote for the bill, they clearly have a stake in its passage, given the big boost for families living in poverty. So for all intents and purposes, they are complicit in the $680 billion addition to the national deficit.

Republicans are normally the party making a big fuss about deficit increases — they have nearly shut down the government before to protest increasing the country’s debt ceiling, which prevents the US from going into any further debt.

So it’s ironic that Republicans are tight-lipped about the deficit now that they’re passing a bill carrying through many of their priorities with no way to pay for them.

It’s probably true that were this bill not passed, the same amount would have been spent on tax deductions being renewed from year to year, adding the same amount to the deficit. But Democrats, ironically, are now upset because without the specter of extenders coming up the next few years, they have fewer opportunities to negotiate in ways to make up the difference.

Sign up for the newsletter Sign up for The Weeds

Get our essential policy newsletter delivered Fridays.