Editor's note: This column was co-authored by Travis Nix.
The tax-extenders package being debated by Congress — which would prolong the life of certain tax breaks, many of which expired almost two years ago — does nothing but tilt the tax code in the favor of well-connected corporations. This package of narrow tax subsides undermines the gains from the 2017 tax cuts and reinvigorates the Washington swamp.
Each tax-extender grants a narrow economic privilege, tailored to some particular group or business interest. That naturally reduces opportunity for individuals and businesses who aren’t showered with special favors by Congress.
The list of extenders includes subsidies for three different alternative fuels, two special types of vehicles, short-line railroads, and certain coal owned by Indian tribes, among others.
Many of these programs, by their very nature, are so complicated that the government agencies which oversee them have been unable to carry out proper enforcement.
For example, the owner of one of the largest biodiesel companies in the U.S. illegally claimed $511 million in biodiesel tax credits over a six-year period in Iowa. A different man in Colorado created a fake company to claim millions in biodiesel tax credits. And in New Jersey, another company claimed $100 million worth of credits for fuel they never produced.
The IRS struggles to enforce narrowly tailored tax incentives like this. It is too difficult to determine what types of fuels qualify for the credit and if the company claiming the credit actually follows through on production.
The result? Hard-working taxpayers subsidize fraudulent tax payments as part of a tax credit that shouldn’t exist in the first place.
As part of another tax-extenders credit program, oil companies are working to receive subsidies for producing “alternative fuel.” Their so-called qualifying alternative fuel is the butane that is in every gallon of gasoline — and has been for a hundred years. Exploiting this tax loophole increased the cost of the subsidy from $555 million to over $7 billion, according to the Joint Committee on Taxation.
Tax credits cannot stimulate good environmental practices and their complexities open the door for big business to take advantage of them.
Electric vehicle credits, similar to the one up for extension, are responsible for over $33 million in erroneous claims in one year, according to the Treasury Department. This includes people who have claimed electric vehicle tax credits for their Hummers and Jeeps.
A Washington Post/ABC News poll recently found that 62% of Americans feel that the U.S. economic system is rigged against them. Whenever we aren’t paying attention, Congress passes narrow privileges for the well-connected. Tax extenders exemplify Americans' feeling that Washington has rigged the system against them.
The result is an economy with less growth and fewer opportunities. It creates a lobbying arms race where every company feels entitled to a special tax credit and average Americans' taxes are higher to pay for the subsidies.
In the tax-extenders package currently before Congress, there are credits that encourage business to invest in American Samoa, Puerto Rico and dozens of other politically favored areas. Others benefit politically defined fuel sources over potentially better and more economically viable forms of energy. These provisions have no place in the tax code.
Even if tax credits did work as intended, periodic temporary extensions are a poor way to construct tax policy, budget policy, and economic policy.
Temporary reauthorizations mask the true cost of what are effectively permanent policy features. They provide an opening for politicians to request patronage from special interests on a semi-annual basis, and create economic uncertainty.
Even worse, retroactive reauthorization of credits that expired in 2017 are nothing more than a windfall profit — a convenient way for politicians to line the pockets of the special interests that support them.
By simply doing nothing, Congress can improve the tax code through attrition. Tax reform has never been so easy.
Adam Michel is a senior policy analyst in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation (heritage.org). Travis Nix is a member of Heritage’s Young Leader Program.
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