Month: January 2013

The recently approved fiscal cliff deal (the American Taxpayer Relief Act of 2012) includes a package of provisions often called the “extenders” because they extend several special interest tax breaks for one or two years each. CTJ’s recent report on the revenue impacts of the fiscal cliff deal highlights a strange thing about the revenue “score” of these provisions from the Joint Committee on Taxation (JCT), the official revenue estimators for Congress.

JCT’s figures show that while the ten-year cost of the extenders is $76 billion, the cost in the first two years would actually be over $100 billion — which is greater than the revenue “saved” in the first two years of the decade by allowing the high-income Bush tax cuts to expire.

This is largely explained by one of the most significant of the extenders: the provision extending “bonus depreciation,” which allows companies buying equipment to take depreciation deductions more quickly than the equipment actually wears out.

The provision will allow companies to take depreciation deductions much earlier than they otherwise would, which will cost the Treasury more than $50 billion over the first two years of the decade, according to JCT. But because those deductions will then be unavailable in later years when they would have otherwise have been claimed, the Treasury will actually collect more revenue during the rest of the decade, so that, according to JCT, the extension of bonus depreciation will have a net cost of just $4.7 billion by the end of the decade.

Of course, in the event that Congress perpetually extends this provision, it will continue to have a large cost each year — and the legislative history makes this result seem likely. Bonus depreciation was enacted in 2002 and has only been allowed to expire for two years (2006 and 2007) since then. In every other year since 2002, Congress made this “temporary” break available. This legislative history is explained in a report from the Congressional Research Service which reviews efforts to quantify the impact of the provision and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

Other breaks extended as part of the “extenders” package, like the research credit and the so-called “active financing exception” are officially “temporary” measures but have been extended over and over again for the last several years. Clearly, Congress’s practice of extending these breaks every couple years must end.

Perhaps he was just floating a trial balloon when Governor Bob McDonnell said he was open to increasing Virginia’s gas tax in some way.  If so, it seems to have been a lead balloon because this week he announced his intention to eliminate the gas tax altogether.

But, experts at the Institute on Taxation and Economic Policy have concluded that the Commonwealth’s gas tax actually needs to be raised by 14.5 cents per gallon, right now, just to make up the revenue ground it’s lost having been stagnant for a quarter century.

Calling the gas tax an unviable revenue source (which is true only when lawmakers like McDonnell fail to modernize it!), the Governor proposed replacing it by raising the sales tax (from 5 percent to 5.8 percent) and increasing vehicle registration fees by $15 for most vehicles and $100 for alternative fuel vehicles.

McDonnells’ plan is riddled with flaws. For starters, this “tax swap” shifts the responsibility for paying for roads away from frequent and long-distance drivers (and the owners of heavier passenger vehicles), onto everybody else.  He very literally gives drivers a “free ride” by eliminating the gas tax, likely leading to more congestion, more wear-and-tear on roads, more air pollution and probably even excessive sprawl in the long run.

Oddly, by repealing only the gasoline tax and leaving the diesel tax untouched, his plan also discriminates sharply between motorists depending on the type of fuel they use to fill up.  The aim here is clearly to continue requiring the trucking industry to pay for their use of the roads (since heavy, diesel-powered trucks produce a disproportionate amount of wear-and-tear, as the Governor understands).  But many light trucks, vans and even some passenger vehicles run on diesel as well, and owners of these vehicles will see their sales taxes rise but won’t see any benefit from the gas tax cut.

McDonnell’s plan also does nothing to improve the fairness of Virginia’s taxes from a progressivity perspective, since both gas and sales taxes are regressive.  If the Governor were instead using a progressive income tax increase to fund transportation, at least he could argue that his plan improves Virginia taxes from an ability-to-pay perspective, even if it makes tax fairness much worse from a “benefits principle” (PDF) perspective—that is, a taxing in accordance with the benefits a given taxpayer receives.

Aside from the changes in tax policy, the Governor’s plan includes an expensive bailout of the transportation fund, when that fund could easily be fixed through gas tax reform.  The legislature has rejected such bailouts in the past for the very good reason that the state can’t afford to spend less on education and the other services which will necessarily have to be cut to fund McDonnells’ bailout.

The legislation signed into law by President Obama on Wednesday makes permanent 85 percent of the Bush-era income tax cuts and 95 percent of the Bush-era estate tax cut still in effect in 2012. It also directs 18 percent of its income and estate tax cuts to the richest one percent of Americans — and directs an identical 18 percent of the tax cuts to the poorest 60 percent of Americans.

These are some of the findings of two reports from Citizens for Tax Justice. One examines the revenue impacts of the fiscal cliff deal and explains why the White House claims the bill saves $620 billion over ten years even while it is official estimated to reduce revenue by $3.9 trillion over ten years. The report also explains that the law includes a package of provisions known as the “extenders” because they extend several special-interest tax breaks for two years, and that these provisions are likely to be extended again in the future and eventually offset the revenue saved from allowing high-income tax cuts to expire.

The second CTJ report examines the distributional effects of the law. It finds that while the law will give the middle fifth of Americans an average tax cut of $880 this year, which is equal to 2.0 percent of their income. At the same time, the law will give the richest one percent of Americans an average tax cut of $34,190, equal to 2.3 percent of their income.

Read the two reports:

Revenue Impacts of the Fiscal Cliff Deal

Poorest Three-Fifths of Americans Get Just 18% of the Tax Cuts in the Fiscal Cliff Deal

Also see CTJ’s New Year’s Day report:

The Biden-McConnell Tax Deal Would Save Less than Half as Much Revenue as President Obama’s Original Tax Proposal

Former President George W. Bush mused recently that if the tax cuts he signed in 2001 and 2003 weren’t named after him, maybe more people would like them. But what’s to like about a package of tax policies that contributed trillions to our national debt and to the consolidation of wealth among an unsustainably small minority of American families?

Well, there’s not much more to like about the eleventh hour legislation just passed by Congress that enshrines the vast majority of those policies permanently in the federal tax code.

The American Taxpayer Relief Act, passed by the U.S. Senate and then the House hours before we all went back to business on January 2, 2013, has generated thousands of contradictory headlines. It’s a tax hike on the rich! A tax hike on the poor! The middle class is saved! The middle class is screwed!

One thing is sure: the U.S. Treasury is screwed. Had these 2001 and 2003 tax cuts – scheduled to expire after ten years because of their onerous cost, but extended for another two in 2010 – actually been wiped from the books, we would have been on the fast track to deficit reduction even without any spending cuts. But having preserved the vast majority of those low rates and loopholes, we’ll be hemorrhaging almost four trillion dollars over the next ten years.

When we first learned of the Senate deal taking shape on New Year’s Eve, we wrote:  

Today, several news reports indicate that the deal taking shape in Washington would raise less revenue than the President’s December 17 proposal. There are reports that the threshold for higher income tax rates would be $400,000 for singles and $450,000 for married couples, and that this $450,000/$400,000 threshold would also apply to higher income tax rates on capital gains and dividends…. Congress should reject any deal that extends more of the Bush income tax cuts or Bush estate tax cuts than President Obama originally proposed to extend. America would be better off if Congress simply does nothing and allows the Bush income and estate tax cuts to expire completely.

When the Senate passed legislation based on that deal, we ran the numbers and published our results on New Year’s Day, 2013, we concluded:

The tax deal negotiated between Vice President Joe Biden and Senate Minority Leader Mitch McConnell and approved by the Senate early on January 1 would save less than half as much revenue as President’s Obama’s original proposal…. The Biden-McConnell deal includes estate tax provisions that are much closer to the even more generous rules of 2011 and 2012 than the 2009 rules.

After a false start and dramatic reconvening, the U.S. House passed that Senate-approved legislation moments before midnight on New Year’s Day, and the President signed it on January 3rd.

Our full analysis of the legislation is contained in two new reports:

Poorest Three-Fifths of Americans Get Just 18% of the Tax Cuts in the Fiscal Cliff Deal

Revenue Impacts of the Fiscal Cliff Deal

The so-called Bush tax cuts that dominated fiscal debates for far too long are now history, and we may never speak of them again. But their legacy endures in our crippling deficit, and our growing economic inequality. And now, thanks to President Obama and the 112th Congress, they will continue to distort our tax system into the foreseeable future.