This week, the U.S. House will be taking up (again) a "tax extenders package."  Many people don't realize that lots of pieces of tax law have expiration dates on them.  Congress sets it up this way in order to create a "must-pass" piece of legislation.

The tax extenders package used to be pretty modest a decade or so ago–maybe $10 or $15 billion to extend a year's worth of business tax deductions and credits.  But since then, it's ballooned to include all sorts of other temporary tax provisions–the alternative minimum tax (AMT) "patch," the first-time homebuyer's credit, etc.  As a result, the extenders package is now about a $100 billion affair for even one year of extension.  When the 2001 and 2003 income tax relief expires at the end of this year, that number will skyrocket.

But there's a pretty insidious tactic that Congressional Democrats have used to turn the extenders package into an annual opportunity for a tax hike.

The reason is the way that Congress scores the tax extenders package.  Because current law calls for them to go away (expire), extending the tax provisions by a year or two "costs" the Treasury money.  Of course, the reality is that Congress is simply preventing a tax hike, but that's not the way it's scored.  In order to "pay for" these expiring tax provisions, recent Congresses have attached permenent new tax hikes.

Think about that for a moment.

In order to keep the tax code we already have and prevent a tax hike, other taxes must go up.  Even worse, the tax hikes which "pay for" our current tax code are permanent, whereas the extender package is temporary.

So, each and every year, a new batch of permanent tax increases is passed into law–merely to keep the tax relief we already have.

Over time, that's a recipe for trillions of dollars in higher taxes, and nothing new to show for it in the way of additional tax relief.

Some deal.

What's a better way to handle this?

  1. Make all temporary tax provisions permanent.  This prevents the hostage-taking that Congress has engaged in recently
  2. Repeal the budget rules that mandate tax hikes merely to prevent other taxes from going up
  3. Consider a broad-based, revenue-neutral (at worst) tax reform that trades in some of these tax deductions and credits in exchange for lower marginal income tax rates