In the face of a looming shutdown of the federal government last week, Congress passed, and the president signed, legislation providing funding through September 30, 2020. Congress added several tax measures to the spending bill, extending various expiring tax provisions, eliminating some taxes enacted in the Affordable Care Act (ACA), and tinkering with retirement tax policies.
But the tax measures generally move in the wrong fiscal direction, adding $426 billion to the nation’s debt over the next decade, while benefitting mainly high-income taxpayers. This follows the $1.9 trillion added to the nation’s debt by the 2017 Tax Cuts and Jobs Act (TCJA), which disproportionately benefitted the highest-income taxpayers.
The bill also fails to resolve many of the technical and substantive problems with the TCJA or tackle serious problems in our tax system.
The zombie extenders
Congress resumed its tradition of extending tax benefits that had already expired or were on the verge of ending. Among this year’s extenders are a deduction for qualified tuition and related higher education expenses, reduced excise tax rates on alcoholic beverages, tax credits for renewable energy investments, and special depreciation rules on race horses and race car tracks.
When “temporary” extenders are enacted repeatedly, they are effectively permanent. But they are scored as short-term extensions, with generally minor revenue cost. And, by being considered as a group at year’s end, extenders escape individual scrutiny by policymakers. This longstanding process for expiring provisions is hard to justify.
Last-minute renewal of temporary tax provisions also makes planning ahead difficult. And when tax extenders are renewed retroactively, it’s even harder to argue that they provide a useful business incentive. But extenders are notoriously difficult to eliminate, notwithstanding a big push to resolve them in 2015. Once an industry receives a short-term tax break, it’s often loathe to let it go.
Repealing deferred, and unpopular, health care taxes
By contrast, Congress permanently repealed three tax provisions originally enacted in the ACA that had been delayed repeatedly or suspended: an excise tax on high-cost, employer-sponsored health insurance (commonly known as the “Cadillac” tax), an excise tax on medical devices, and an annual fee on health insurance providers.
The Joint Committee on Taxation (JCT) estimates that these three health taxes account for about $373 billion of the $426 billion loss from the tax measures in the bill. Repeal of these provisions, will largely benefit the highest-income taxpayers, especially the repeal of the Cadillac tax.
Tinkering with retirement tax policy
Congress also adopted the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which had been introduced earlier in the year. This legislation tinkers with how the tax code treats retirement plans, by increasing the age, from 70½ to 72, when individuals must start to take required minimum distributions from their accounts, making it easier for employers to extend coverage across multiple firms, and requiring recipients of inherited accounts to take distributions—and pay taxes—more quickly (i.e., non-spouse beneficiaries can no longer stretch IRA distributions over their lifetimes).
The SECURE Act thus helps the tax code adjust to a world in which workers live longer, and it reduces some administrative costs. However, the act merely makes piecemeal improvements; it fails to reform a tax system for retirement that already disproportionately benefits the highest-income. And it did not incorporate many good ideas to increase savings by low- and middle-income taxpayers. To be fair, the SECURE Act was, overall, revenue neutral, as it largely offset revenue-losing measures by ending stretch IRAs.
Tweaks to the TCJA
Two years ago, a Republican Congress rushed through the TCJA in 50 days, and passed it on a strictly partisan vote. The fast passage of the TCJA, and the closed nature of the process, meant the legislation contained lots of glitches, intentional and not. Congress fixed a couple of the most high-profile errors in this year-end tax bill. As a result, children won’t pay taxes on military survival benefits at high trust and estate tax rates. And Congress repealed the TCJA’s “church parking tax,” a 21% tax on certain fringe benefits for churches and other nonprofit employees.
But Congress missed an opportunity to address a large number of technical and substantive issues with the TCJA. For example, the “retail glitch” remains, so many businesses are worse off under the TCJA’s expensing rules that they thought would benefit them.
Taxes remain on the table
As we round out the year with routine extensions, continued spending through the tax code, modest reforms, and last-minute hijinks, it’s clear that 2019 hasn’t been a banner year for tax policy. But taxes are at center stage of the presidential debate. And there will continue to be reform opportunities for tax policy for many years to come.
