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Saturday, June 9, 2012

Hearing on expiring tax provisions


On June 8, a House Ways and Means subcommittee held a hearing on Framework for Evaluating Certain Expiring Tax Provisions. I think that is a good approach to the topic of dealing with the roughly 60 provisions that expired at the end of 2011 (many of which expire on a regular basis), as well as the 40+ that expire at the end of 2012.  I think all of the provisions are ones that reduce government collections (tax cuts). (See this Joint Committee on Taxation report for a list of the expiring tax provisions.)

A framework to evaluate them, if consistently used, is a logical way to address the question of which should expire as their purpose is no longer needed, which should be extended and of those extended, should it be permanently or temporarily. Some of the expiring provisions, such as the Social Security tax cut for employees and self-employed individuals was for economic stimulus. Thus, it should not be renewed. Others, such as the research tax credit, are temporary because lawmakers don't find permanent ways to pay for that tax cut. There are good policy reasons for a permanent research tax credit. They include that it will be more effective as a permanent provision rather than a temporary one. It is also disingenuous to keep renewing it rather than all in one effort finding the revenue to allow for a permanent research credit. I say disingenuous because when it is renewed, temporary revenue is found to pay for it and this is done over and over again (I think 13 times so far since the credit's first expiration in 1985). 

At the June 8 hearing, the GAO suggested this evaluation framework:
GAO Testimony of June 8, 2012
I think that is a good set. I'd also add the need to evaluate whether the purpose of the provision is still pertinent (assuming it ever was). I'd also add that if it is determined that the provision should be extended, whether it should be temporary or permanent. 

Another problem with expiring provisions is that they get a good amount of attention relative to permanent provisions of the law. Many state governments place sunsets on tax cuts to ensure that they do get regular review.  I'd suggest that any new tax cuts have an expiration date and that a system be created to enable all of the over 200 tax cuts in the system get reviewed over the next 5 years. Both President Obama and Mitt Romney (as well as Congressman Camp) have called for reducing tax preferences (or they may call them loopholes or tax expenditures). So perhaps the review of all of them will occur in the next few years - that would be great for the tax system. 

I suggest this reminder:

Tax expenditures should only be used and continued if they are an appropriate use of government resources and the best way to deliver the intended benefit.

I am going to work on testimony to submit for the written record; I'll post it here as well.

What would you suggest for your framework on how to evaluate expiring tax provisions? 

1 comment:

Ami Shah said...

Framework to evaluate the expiring tax provisions is really necessary since there are so many provisions that expire every year. The purpose of that tax cut should be the number one aspect to be considered of an expiring provision. Temporary tax cuts like first time home buyer credit, credit for hybrid car, making work pay credit did expire as their purpose was no longer needed. But at the same time repeal of estate tax for 2010 did expire because Congress could not act in timely manner. That resulted in substantial revenue loss as well as compliance and administration cost. Some of the tax cuts which are required like inflation adjustment for AMT should be renewed ahead of time to avoid last minute rush. Timing of reviewing the expiring provision is as important as revenue aspects. The revenue effects should be considered net of compliance and administration costs. I would suggest the following order for evaluation.
1. Purpose of the provision
2. Revenue effects as well as effects on the economy
3. Deadline/Timing for the renewal
4. Principles for good tax policy
• Equity
• Simplicity, transparency and administrability
• Economic efficiency
• Rest of the principles suggested by AICPA