New Year’s Resolution: No More Zombie Tax Loopholes

While tonight is New Year’s Eve for the rest of the country, inside the Beltway over the last few years December 31st has been akin to the Night of the Living Dead. Not because worn out Capitol Hill staff and interns wander the streets in a drunken stupor (though this is an accurate assessment), but because dozens of tax extenders set to expire at year’s end are usually reauthorized in bulk by Congress. These dying subsidies and loopholes in the tax code, used by Congress to micromanage the economy through perverse incentives, are all too often brought back like Frankenstein’s monster in some last-minute deal hailed as bipartisan compromise (See: American Tax Payer Relief Act of 2012).

While most of the 46 some-odd provisions that are set to expire tonight as the ball drops in Times Square are written to serve some inarguable and noble purpose, in the long-run these added complexities are bad for the economy. The Taxpayer Advocate Service, the office within the IRS which has the sole purpose of highlighting and combatting the most pressing issues of the tax process, lists tax code complexity as the number one issue facing taxpayers. Any step to chip away at the 4 million-word-long tax code is thus a welcome one.

Further, many of these provisions incentivize inefficient investments which have potentially serious economic consequences. This is Congress picking winners and losers before the market has a say, and when that happens we all lose. One such expiring provision is the renewable energy Production Tax Credit (PTC). The PTC, which subsidizes the production of electricity from renewable energy sources like wind, biomass, and geothermal has the effect of incentivizing the introduction of inefficient, unreliable, and largely experimental energy technologies onto the nation’s power grid. Wind power is particularly egregious, as peak wind energy production is inversely correlated to electricity demand, meaning that taxpayers are subsidizing wind companies to produce electricity when they need it the least. This has massively distortional effects on the electricity grid the nation can ill-afford during this tepid recovery. This is all on top of the fact that the environmental “benefits” of “green” energy like wind are marginal if not entirely imaginary. The PTC was set expire at the end of 2012, but was revived and expanded by Congress for at least the third time since its original expiration date in 1999. The cost? $12.2 billion.

All told, the Congressional Budget Office estimates that eliminating the PTC and the other 45 provisions set to expire tonight will save the federal government and taxpayers nearly $1 trillion dollars over the next 10 years. ($938.3 billion)

That being said, while many of the credits, subsidies, and loopholes that are lapsing are, in large part, either economically detrimental like the PTC, or just plain silly like “Three-Year Depreciation for Race Horses Two Years or Younger” or the “7-Year Recovery for Motorsport Racing Facilities”, some are certainly worth taking another look at. It’s hard to argue against the tax deduction for teachers’ out-of-pocket classroom expenses or the “Employer Wage Credit for Activated Military Reservists”. Without doubt, upon their return from the holiday, Congress will seek to reauthorize the bulk of these 46 programs while only touting no-brainer provisions like the preceding two. Yet it is critical to remember two things:

  1. Reauthorizing tax credits and subsidies for the neediest and noblest members of society does not justify extending corporate welfare through programs like the PTC.
  2. Many of the problems that these special loopholes seek to alleviate can be solved by comprehensive tax reform that simplifies and lowers the tax burden across the board, from teachers to tycoons.

Expiration dates are written into tax credits and subsidies for a reason. Instead of reneging on the rules that it has set for itself by taking the easy way out and granting a broad re-authorization of these expiring provisions, Congress should use this moment to kick-start a comprehensive evaluation of the entire tax structure and code. Let’s take the IRS’s advice; the tax code must be simplified and the tax burden lowered for all Americans, not just the ones that catch the sympathies, or can afford to catch the ear, of Congress. To live and let expire the 46 programs ending tonight is a critical first step in this process.

For a full list of the tax extenders set to expire, please see this Congressional Research Service Report: http://www.fas.org/sgp/crs/misc/R43124.pdf