Congressional leaders have responded to the backlash against the original $174 billion cost of the “tax extenders” bill by reducing its cost by $47 billion. Even with the reduction, the bill will still add $84 billion to the deficit over the next decade. They have reduced the amount of spending in the most cynical fashion possible – by cutting the number of years over which the spending would occur. Of course, they have every intention of extending the spending again when the current extensions expire.
The irresponsible overspending in the tax extenders bill is not the only fatal flaw of the legislation. The $43 billion of tax increases included in the bill to offset part of its cost will slow the recovery of the fragile economy. Even worse, Congress is once again in such a rush to pass a bill it isn’t bothering to figure out the broader impact these tax hikes, especially those affecting U.S. businesses operating abroad, could have on the economy and the competitiveness of United States businesses that operate internationally.
Of greatest concern in this regard are the proposed reductions of the foreign tax credit that would severely curtail the ability of United States businesses that operate internationally to avoid double taxation and will drive countless more jobs – and even corporate headquarters — overseas. That’s for sure. But what isn’t certain is how much damage would be done. The troubling changes to the foreign tax credit came out of the clear blue sky. No one, including Congress and the businesses that would be affected, has had time to get a handle on how the provisions would operate or the broader impact they will have on the United States’ international competitiveness.
The changes to the tax treatment of S-corporations included in the bill raise significant concerns because there has been no analysis of the economic impact they will have either. On Tuesday, President Obama referred to himself as a “fierce advocate” for small business. If he signs legislation containing these tax changes, small businesses are going to wonder who, with fierce advocates like this, needs tame enemies.
Congress should stop its rush and give the business community time to understand the provisions and comment on them as appropriate, and recognize that lashing business with punitive taxes is a tough economic policy to defend especially when the unemployment rate is near 10 percent.
The reductions in spending that are supposed to sweeten the deal and make the harmful tax hikes more palatable come from reducing the extensions of unemployment insurance (UI) and COBRA health insurance coverage by 1 month (the original bill extended both through December 2010, the new bill scales that back to November 2010) and by putting off reductions in payments to doctors that accept Medicare – the “doc fix” – for 2 years instead of the 4 years in the original bill.
The savings from limiting the extensions of these programs will no doubt be short-lived. Congress will undoubtedly continue to extend UI, COBRA subsidies and bailouts for state Medicaid programs as long as unemployment remains high – even though evidence is mounting that extended UI prolongs unemployment for recipients.
The doc fix is a longer-term problem that requires a permanent fix from Congress. Of the $47 billion of spending taken out of the original bill, $40 billion comes from taking 2 years off the doc fix. Further temporary extensions are a certainty until Congress passes a permanent fix, so the “savings” in the current tax extenders bill are really nonexistent. There is no way Congress can allow a 33 percent reduction of payments to doctors that is scheduled under current law to take place in 2012 because that would jeopardize access for millions of seniors who depend on Medicare.
Congress needs to slow down. There is broad bipartisan consensus that the tax extenders provisions should be passed. A better approach would be to address those provisions alone, without the unnecessary and damaging tax hikes, and put off all such spending until Congress has found responsible spending cuts to pay for them.