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How long should we extend temporary tax breaks?

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Len Burman of the Tax Policy Center reminds us that more than 70 short-term tax breaks expired on Dec. 31 — little-noticed casualties of the payroll tax fight, which overshadowed the other tax provisions with built-in sunset dates. These included everything from a tax credit for mine rescue team training and a break for “motorsports and entertainment complexes” to a production tax credit for wind power, as my colleague Brad has discussed. SOURCE: BLOMOBERG

Congress plans to offer up an “extenders” bill to prolong the life of many of these provisions for another year or two, which could reinstate some of them retroactively. But Burman questions whether constantly revisiting these tax extensions is the best approach to tax policy.

On the surface, it appears to be fiscally responsible to subject these tax breaks to regular review. But Burman points out that short-term extensions are less likely to be paid for, given that they’re smaller scale, and that congressional foot-dragging can make them self-defeating. “Congress’s chronic procrastination means that many temporary provisions are not extended until after they have expired,” he writes. “The uncertainty means that taxpayers might rationally discount the actual tax breaks and that raises the odds that they will simply provide windfalls rather than affecting behavior.”

Instead, Burman proposes a “three strikes” rule: “after a provision has been extended three times, it should either be made permanent (and its cost fully offset) or it should be erased from the books.” That said, Burman believes the best solution would be comprehensive tax reform. A great many legislators would agree, but our political dysfunction means that’s still a ways off from happening.

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