This Tax Legislation Is Terrible, But It Might Be Worth Passing

The new tax agreement could be better than the alternatives.
Congress just passed a package of tax cuts. That might be better than the alternative.
Congress just passed a package of tax cuts. That might be better than the alternative.

Congress is on the verge of passing a package of very expensive tax cuts and there’s plenty about it to despise.

It’s full of huge corporate giveaways. It will drive up the deficit. It might even lead to higher health care costs.

So what’s the case for passing it? Simple, say some of the agreement’s proponents: It’s better than the alternative.

It's not an inspiring argument, but it may be correct.

Why the tax agreement seems so awful

Basically, there are two ways to think about the tax package.  One is to focus strictly on the merits, or lack of merits, for the most well-known provisions.

1. It’s full of corporate welfare. The centerpiece of the package is the renewal of some temporary tax breaks for businesses. Among these are portions of the tax code that allow multinational corporations to shelter overseas income and a special “bonus depreciation” break that allows businesses to write off the entire cost of new investments right away, rather than over time.

Bonus depreciation became law in 2009, as part of the American Recovery and Reinvestment Act, and it was supposed to encourage hiring. Subsequent studies found no solid evidence that it did. But when the tax cut was about to expire, Congress renewed it anyway. It’s pretty much the definition of corporate welfare. And now it will stick around for a few more years.

2. It suspends taxes on the medical device industry. The new tax agreement also suspends or postpones introduction of several levies that became law as part of the Affordable Care Act. That includes a tax on health insurers and a tax on device-makers. The idea behind the Affordable Care Act was that each major component of the health care industry would have to give up some money, in the form of either lower reimbursements or higher taxes. But the device industry has howled about its contribution from the get-go, claiming that it would stifle innovation and destroy jobs.

The innovation argument is shaky at best and, for all of the whining about the tax, which took effect two years ago, the industry appears to be making comfortable profits. But Congress is about to suspend the tax for two years anyway.

3. It pushes back the Cadillac tax. More significant, perhaps, the tax package will delay by two years introduction of the “Cadillac tax” -- a levy on the most expensive health plans that, most economists believe, would help to reduce health costs. Key architects of the law, including former Budget Director Peter Orszag, consider it a pillar of the law’s architecture. But it’s unpopular with almost everybody else who knows about it, particularly the labor unions that have negotiated generous health plans for their members.

4. The official budget deficit will be higher. Put all these changes together -- renewing some tax cuts that were set to expire, then postponing or suspending taxes that were supposed to be in effect -- and the total comes to nearly $700 billion in lost revenue over the next 10 years, as HuffPost’s Michael McAuliff reported on Wednesday.

That’s a lot of money, even relative to the massive federal budget. And since Congress isn’t simultaneously reducing spending or finding new revenue to offset the lost tax dollars, the package will simply add to the deficit. “The failure to pay for this legislation is completely at odds with rhetoric about fiscal responsibility and balanced budgets,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

Why the agreement might still be better than alternatives

MacGuineas, of course, is right. And it's particularly frustrating because Congress is now using different rules for spending initiatives and tax cuts, requiring offsets for the former but not for the latter.

But imagine for a moment that Congress wasn’t about to pass this package. What would it be doing instead? Quite possibly, Congress would be doing something even worse.

1. Nobody was stopping the corporate welfare anyway. When it comes to the corporate tax cuts, for example, chances are good that Congress would be renewing those anyway. It’s actually become something of an tradition. Each time the tax cuts are about to expire, the businesses that rely on them scream, and Congress responds by extending them for a little longer. They’ve come to be known as the “extenders” for that reason. Their full impact may not show up in the official budget projections but, rest assured, they are already increasing the deficit.

If anything, the new tax deal might improve the situation -- that is, increase the odds that the most egregious tax cuts eventually go away. One reason Congress keeps renewing the extenders is that they come up together, along with some more defensible tax breaks, forcing an up-and-down vote on the full package. The agreement Congress is about to pass will make those more defensible tax breaks permanent, while gradually reducing the value of the bonus depreciation break. If Congress wants to renew bonus depreciation when it expires again in five years, it will have a slightly harder time doing it.

2. The health care taxes were probably gone too. The loss of the health care taxes is more disappointing, since some of them were already in place and the one that was about to take effect, the Cadillac tax, could play such an important role in containing health care costs.

But while the White House had fought hard to defend these taxes, the pressure to stop them was becoming overwhelming, with strong support not just from Republicans but also from prominent Democrats. Among the loudest critics of the device tax were high-profile liberal senators such as Al Franken (Minn.), Amy Klobuchar (Minn.), and Elizabeth Warren (Mass.), whose home states, not coincidentally, are home to large device-makers.

The charge to eliminate the Cadillac tax was being led by Senate Minority Leader Harry Reid (D-Nev.). He wasn't just reacting to pressure from labor. He was also reacting to pressure from within his own caucus. With the notable exception of Sen. Mark Warner (D-Va.) and a handful of others, the Cadillac tax had almost no friends in Congress, on either side of the aisle.

Suspension and delay of those taxes, rather than outright repeal, at least preserves the possibility that Congress will at some future date allow the taxes to take effect -- or, perhaps, find some kind of alternative policy that serves the same or similar purposes. (The agreement actually tweaks the Cadillac tax, fixing one of its well-known flaws, so that might make maintaining it a little easier.)

3. The package will help the working poor and middle class. And while the Obama administration ultimately couldn’t save the device or Cadillac tax, it did win a few key victories. The same tax deal will make permanent significant tax breaks for the working poor, parents and families paying for education expenses. These are not small things. Altogether, these tax breaks probably represent the biggest anti-poverty effort of President Barack Obama's second term. And they'll help some members of the middle class, too.

4. It could contain health insurance premiums in the short term. While the one-year suspension of the health insurance tax will cost the government a little revenue, it will also help insurers make up for money they were originally supposed to get from the government, through a special program called “risk corridors,” but never received because Republicans managed to eliminate the funding in last year’s spending agreement. That should help stabilize premiums for the next year or two. (If you’re an Obamacare hater like Michael Cannon, of the Cato Institute, this is a bug and not a virtue of the agreement.)

The redeeming value of those changes -- particularly extra financial assistance for the working poor and middle class -- help explain why Robert Greenstein, president of the Center on Budget and Policy Priorities, offered a more tempered assessment than MacGuineas.

“The tax parts of the new bipartisan deals include provisions that mark a major achievement in reducing poverty and helping poor and modest-income working families, but also disturbing provisions that could cause budget deficits and health care costs to rise substantially over time,” Greenstein said on Wednesday.  “Assessing the tax provisions as a whole depends on the standard one uses: whether one compares them to exemplary tax policy or to what policymakers likely would do in the absence of these deals.”

To be clear, Greenstein doesn't believe the tax agreement represents smart policymaking. Neither would most experts. But the question is whether, given how Congress typically behaves, this agreement represents a better alternative. It might.

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