“Temporary” since the 1980s

Michael Tanner, senior fellow at the Cato Institute, explains in NRO why the “tax extenders” bill—bad legislation with bipartisan support—should be dumped. Here are just some of the special interest winners in this “temporary” (since the 1980s) tax bill:

The “green energy” lobby—from electric cars to energy efficient appliances to ethanol producers.

Hollywood, railroads, NASCAR, and owners of race horses under 3 years old.

Puerto Rican rum.

At 35%, the U.S. has the highest federal corporate tax rate in the developed world. As Mr. Tanner notes here, Congress needs to get serious about “pro-growth tax reform that will lower rates and remove special-interest favors from the tax code.”

Even the few provisions designed to help ordinary taxpayers are likely to have unintended consequences. For example, state income taxes have long been deductible from federal taxes, but this legislation would allow taxpayers to choose to deduct state and local sales taxes instead, meaning that people in states with no income tax would now benefit from the deduction as well.  But such tax breaks simply encourage states to raise their taxes. They are, in effect, a reward for high-tax states. Economists estimate that state taxes are 13 to 14 percent higher than they would be in the absence of federal deductibility.

Similarly, the American Opportunity Tax Credit, which allows parents or children to claim a tax credit for tuition and other education expenses during the first four years of college, is primarily passed through to higher tuitions. As a result, the credit may actually make it more difficult for non-qualifying families to afford college.

Making matters worse, none of these tax breaks is offset with corresponding spending cuts. The reported deal would add $530 billion to our national debt over the next ten years, including additional interest costs. Normally, it is a mistake to attribute the full cost of tax cuts to the debt. But so few of the provisions in the tax-extenders bill are likely to lead to increased economic growth that this time it may be fair to call it a budget buster.