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Congressman Tom McClintock

Representing the 4th District of California

House Amendment 2 to HR 2029 – Tax Extenders Act: YES

December 17, 2015
Vote Notes on Legislation

House Amendment 2 to HR 2029 – Tax Extenders Act: YES.  Called the “Protecting Americans from Tax Hikes Act” this 233-page bill provides a complex list of changes to the tax code.  Once again, there is both good and bad.  

It makes a variety of temporary business tax deductions, most notably the Research and Development Tax Credit and a provision that allows businesses to deduct the cost of many major equipment purchases in the year they are made.  Permanency of these business tax deductions is essential if they are to serve their purpose of promoting growth and investment policies.  

On the negative side, the bill also makes permanent the failed stimulus package as it affects welfare programs such as the “Earned Income Tax Credit.”  These are not true tax credits, solely deducted from actual tax liability, but rather are welfare payments administered through the tax code.  The three biggest of these programs, (EITC, Earned American Opportunity Credit and Enhanced Child Tax Credit) amount to $198 billion over the next ten years – one third of the projected cost of the bill.  This doesn’t include a wide variety of additional tax credits that fund the administration’s “Green energy initiative” and an array of other special interest sops.  

Which brings us to the $622 billion gorilla in the room – the ten-year increase in the nation’s debt that the Joint Committee on Taxation projects as a result of this measure.   It is important to understand exactly how this figure is calculated.

First, two-thirds of the cost is associated with extending or making permanent the various business tax provisions discussed above.  These are defined as tax cuts – therefore reductions in revenue -- but this is true only in theory and not reality.  The reality is that current taxes will not be cut as a result of this measure – they are simply not going to be increased.  Without this bill, struggling job creators would be hit with massive tax increases over what they are currently paying, with severe economic consequences.  

Second, it increases the debt on paper but not in practice.  In practice, these tax provisions are routinely extended and are already accounted for in the CBO’s “alternative forecast” model, which projects actual anticipated spending.   These changes would simply bring the alternative forecast (what we actually spend) in line with the baseline forecast (what we theoretically spend), providing for more honest accounting of a deficit that is already there but not acknowledged in the baseline forecast. 

Third, because the extensions are routinely done late in the year, they do not provide the economic incentive necessary to maximize their impact.  Making investments based on the possibility of later tax benefits – rather than the certainty -- introduces a significant element of risk that reduces their effect on behavior.  

Fourth, these provisions have a positive dynamic effect that will partially offset their paper cost with new revenues produced by resulting economic growth.  It is impossible to accurately quantify that effect, but it could be significant and can’t be ignored.   

This is not the case with the extensions of “stimulus” policy that use the tax code to administer welfare payments.  These provisions actually require additional outlays of real money to provide these “refundable” credits.  The theory is that this money will be spent by non-taxpaying families to create additional economic activity, but ignores the fact that it reduces the amount available for taxpaying families to spend by the same amount.

For me, the issue boils down to this: does the imperative of preventing a scheduled major tax increase on job creators in the seventh year of the Obama economic malaise outweigh the damage done by roughly $200 billion of new spending over the next ten years?   I think it does, although I doubt it will generate enough new revenue to offset the actual costs of the bill.  In this respect, it will widen the actual deficit at a time when the national debt poses the greatest single threat to our nation’s security and welfare.  Because of this, concomitant cuts in spending are all the more imperative, something “The Omnibus” spending bill (adopted as Amendment 1 to HR 2029) spectacularly fails to do.