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How Congress Can Stop Its Tax Procrastination

Betsey Stevenson is a Bloomberg View columnist. She is an associate professor of public policy and economics at the University of Michigan. She was on the President’s Council of Economic Advisers and was chief economist at the U.S. Department of Labor.
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While Americans ready their holiday shopping lists, Congress is busy with its own holiday tradition -- preparing a grab bag of corporate giveaways known as "tax extenders." The gifts, which range from the useful to the absurd, have one flaw in common: They're about a year too late.

With a bit of political will, Congress could get up to date and even save some money.

There's ample room for debate about whether the government should offer tax breaks to encourage the development of wind and solar energy, or let businesses fully deduct the cost of new equipment. But it's undeniable that the bizarre process by which Congress grants such preferences undermines whatever benefits might be gained.

Here's how it works. The tax breaks are designed to be renewed at the beginning of every year, a mechanism that allows Congress to ignore their longer-term cost. But legislators invariably wait until the end of the year, extending the breaks retroactively. This leaves businesses in the dark: They can either go ahead with investments on the optimistic assumption that Congress will act, or they can be cautious and risk missing out. Then Congress rewards them -- or doesn't -- for decisions made in the past.

Last year, Congress delayed so long that businesses had only 13 days left in the year to change their behavior based on these tax “incentives." This year is no different. Despite pleas from the business community, legislators have waited until now to take up the extensions. The same is true for funding the government: Two and a half months into fiscal 2016, a temporary budget is set to expire on Friday, and another temporary budget will likely be needed as Congress continues to wrangle over a longer-term spending bill.

We need to find a way to end this procrastination. The tax extender tradition has become a perfect example of waste in government. The amount of money flying out of the door at the end of the year is staggering, given that it has become divorced from any incentives that would benefit the economy.

So here's a plan.

First, legislators should pick the tax breaks they want and make them permanent. This would ensure the biggest bang for the buck: Businesses would be able to engage in long-term planning, knowing the tax consequences in advance. It would also allow Democrats and Republicans to avoid wasting time -- and taxpayer money -- having the same argument every year.

At first glance, the price tag might seem high. Over 10 years, the tax breaks could be worth as much as $800 billion. This has been a sticking point for fiscal conservatives and even for Democratic leader Nancy Pelosi, who said the tax package "was on a dangerous path of being too large for members to support."

The cost, though, should be measured in comparison to what would happen otherwise. I'd put the odds at 90 percent that Congress will extend the tax breaks in each of the next 10 years anyway, bringing the price to the same $800 billion. So the incremental cost of a permanent extension is really closer to $80 billion. That's still not chump change, but given the benefits of creating certainty and ending the annual last-minute scramble, it's a small price to pay.

There's also a way to make the price tag even smaller, with little impact on the economy. Don't pass the extenders for 2015. It's too late. It should have been done 11 months ago. Businesses will complain, but frankly they've already made their investments, and a permanent bill will give them all the incentive they need to keep doing so.

Granted, businesses might not trust Congress to act at the last minute anymore. But that's a feature, not a flaw. The willingness to accept Congress's procrastination only enables it. Failing to give businesses the last-minute gifts they were hoping for is just the way to stop it. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Betsey A Stevenson at betseys@umich.edu

To contact the editor responsible for this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net