Deficit, schmeficit: Why the fight over the research credit is really about tax reform.


Rep. Dave Camp, left, is still focused on fundamental tax reform. (AP Photo/J. Scott Applewhite)

The House voted 274 to 131 Friday to make permanent a popular tax break for corporate research and development that has survived for three decades as a "temporary" measure. This has drawn loud complaints from many Democrats, who note that the Republican proposal would add $155 billion to the budget deficit over the next decade.

But Democrats don't want to do away with the credit. No, the Democratic Senate will vote as soon as next week on another temporary extension. The Senate plan would revive the research credit through 2015, along with a slew of other tax provisions that expired in December -- at a cost to the Treasury of $84 billion over the next decade.

But all this handwringing over the deficit is beside the point: Congress has rarely paid for extending the research credit and other so-called "tax extenders." And the grand-daddy of all tax extenders -- the nearly $4 trillion fiscal cliff deal that made permanent most of the Bush tax cuts, among other policies -- passed with nary a peep about paying for it.

The current debate is actually about two other things: The 2014 congressional midterms. And comprehensive tax reform.

The election connection is easy to explain: In recent years, Congress has waited until after the election to deal with extenders, a collection of special-interest provisions that mainly benefit business. This time around, Senate Democrats saw an opening to attack House Republicans as being unfriendly to business because House Ways and Means Committee chairman Dave Camp (R-Mich.) was determined to advance his sweeping tax reform plan instead. That created the possibility that the research credit would be languishing in the House come November. Senate action to revive it could give vulnerable Senate Democrats a useful pro-business credential.

But House Republicans caught on quickly. And since they had no intention of staging a vote on Camp's ambitious but politically perilous tax reform plan, Camp switched gears and began moving on tax extenders. But he has insisted on reviving only those provisions that should be made permanent (i.e., the research credit) while allowing the rest to die a quiet death (hello, accelerated depreciation for NASCAR tracks).

One reason: Camp is still trying to clear a path for comprehensive tax reform.

This part gets a little tricky, because it involves budget baselines. Because the tax extenders are temporary policy, they are not included in projected revenues. That means the revenue baseline -- a projected $40.5 trillion in tax collections over the next decade -- is higher than it otherwise would be.

If the tax extenders were  made permanent, the revenue baseline would fall accordingly. The six tax breaks Camp's committee has so far voted to revive would reduce the 10-year baseline by about $300 billion. Making permanent the full complement of extender tax breaks would reduce revenues by about $560 billion, according to the left-leaning Center on Budget and Policy Priorities.

If tax reform is intended merely to raise the same amount of money through more efficient means, as Republicans insist, then a lower baseline means a lower revenue target -- which makes it easier to lower rates.

This effect was noted in a CBPP blog post: "If  policymakers make the extenders permanent in advance of tax reform, a future tax reform plan would no longer have to offset the extenders’ cost — $560 billion over ten years — in order to achieve revenue neutrality. Policymakers could instead use this money to lower the top tax rate further, at the cost of higher deficits and additional pressure to reduce only spending programs to address the nation’s long-term fiscal challenges."

Rates were a huge problem for Camp when he was drafting his tax reform plan. Though he had promised to get the top income tax rate down from the current 39.6 percent to 25 percent, he was forced to maintain a top rate of 35 percent for the very richest Americans in  order to raise enough cash (and to avoid a big tax cut for the wealthy).

Camp, who is retiring in January, confirmed in an interview that making tax extenders permanent would make it easier for his successor (presumably Rep. Paul Ryan (R-Wis.)) to push rates down further. 

"It's certainly a byproduct of it," he said, adding that the more important goal is certainty for business.

"We've been extending these for decades, in some cases, and not quote-unquote paying for it. So, let’s just call it what it is and make this permanent so that employers and innovators can plan and we’re not different than than the rest of the world, which doesn't have important policies expire."

So far, Senate Republicans have not lined up to support Camp's strategy, in part because they fear taking any action before the election that would add big numbers to the budget deficit.  Indeed, Republicans in the Senate Finance Committee supported the Democratic bill to revive the extenders for just two years.  

Finance Committee chairman Ron Wyden (D-Ore.) is now hoping a solid vote in the full Senate will end the debate. 

"We have a bill -- bipartisan -- ready to go to the floor, passed unanimously in the Senate Finance Committee," Wyden said. "I like to think now we've  got some momentum."

Wyden's hopes may be complicated by the fact that the GOP bill, too, got bipartisan support. On Friday, 62 Democrats joined Republicans in supporting the plan to make the research credit permanent.

If Wyden's approach prevails, that would preserve much of the current baseline for tax reform, whenever Congress might get to it. Most observers see little hope of action on that front until after a new president takes office in 2017.

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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