(Editor’s Note: This article first appeared in the [i]Wall Street Journal[ei])
A $250-a-year subsidy for those who commute to work using New York’s "bike share" program. Breaks for Broadway plays like "Of Mice and Men" starring James Franco and Chris O’Dowd, up to $15 million per production. A $71 million benefit for Nascar facilities. Billions in credits for the wind-energy industry.
All that and more, coming soon to a taxpayer near you. It’s once again time for the annual special-interest orgy known as the "tax extender" legislation, a giveaway bill that Congress plans to take up in the coming weeks.
Since the 1980s, when Washington last enacted comprehensive tax reform, Congress has passed extensions of ostensibly "temporary" tax breaks for interest groups. The package is referred to as "tax extenders" because the breaks are almost always extended by Congress without much opposition. The 2014 installment could cost $85 billion in the next two years, and legislators are piling on their pet projects since it’s considered "must pass" legislation.
This is all a mistake. Congress needs to clean up the tax code and lower marginal rates across the board, but tax-extender legislation delays any serious reform. Congress should let the extenders expire permanently, and the Club for Growth, the free-market organization I run, intends to oppose the package. If a vote occurs, we’ll likely include it on our annual congressional scorecard, which goes out to more than 100,000 of our members.
Many tax extenders are government spending disguised as tax breaks, such as a three-year depreciation for racehorses. Others amount to a kind of earmark: Sen. Chuck Schumer (D., N.Y.) just added the credit for Broadway plays. Tax-extender legislation is also the occasion for campaign contributions, as lobbyists donate to ensure their special treatment continues. Recently, a reporter tweeted a picture of the Senate Finance Committee markup of the tax extenders bill. The room was packed. It filled up so quickly that some lobbyists had to watch the proceedings in the hallway on their iPads.
The tax credit for research and development, which cost more than $6 billion in 2013 according to the Tax Foundation, exists to encourage companies to innovate. But R&D often takes longer than one year, and companies can’t plan on such short extensions. And the credit benefits already profitable companies. In 2012, the research and development credit cut Google’s first-quarter income-tax liability in half, according to a 2013 Wall Street Journal report. Other beneficiaries include Intel and Boeing.
Allowing these credits to expire would do little if any harm to the overall economy. Specific industries that have too long considered the government a good customer would have to adjust. But the positive effects of ending capital misallocation would outweigh the temporary downsides. First Trust Advisors LP Chief Economist Brian Wesbury told me that "moving away from a lobbyist-oriented mentality of annual gifts to special interests will actually improve medium- to long-term economic prospects."
The most compelling argument for keeping these special tax breaks is that someday they could be used as bargaining chips to "pay for" marginal rate reductions. Unfortunately, that’s a fantasy. Accounting tricks at the Congressional Budget Office ensure that tax extenders cannot pay for rate reductions. CBO projections already assume the revenue gains that ending the extenders would bring, even though that money doesn’t exist.
As Sen. Pat Toomey (R., Pa.) noted, "by pretending they will expire, Congress can claim the revenue their expiration would generate and disguise the true size of future deficits." This removes any incentive to end them—and there’s no incentive even to make the extenders permanent. Members of Congress benefit most by keeping the tax breaks temporary and extending them every year for eternity.
Eliminating the extenders would increase government revenues, but that’s not the reason for ending them. Pro-growth tax reform would likely also bolster government revenues—but would do so in a way that would benefit the economy. Getting rid of tax extenders might even motivate affected industries to lobby for real tax reform that would lower individual and corporate rates. That’s what the country needs, and tax extenders are a distraction. They’ve stuck around because few have bothered to fight them. We’re taking up the fight, in order to clear the field for real reform.
Mr. Chocola, a former congressman from Indiana, is president of the Club for Growth.
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