Anyone who ever ate at my mother’s house will tell you that she was an amazing cook. Everything always turned out well. And, she somehow managed without an instant-read digital thermometer.
I, unfortunately, did not inherit Mom’s innate abilities and am about to buy my fourth digital thermometer. I cleverly “saved” a lot of money by not buying the $90 version the pros use in the first place. I failed to look at the long-term cost, so I am paying for my short-sightedness. This time I will shell out the 90 bucks. (Sadly, I will still not be in my mother’s league in the kitchen.)
The country has had many of its own digital thermometer moments on its way to the current budget dilemmas. Since the imposition of pay-as-you-go budget rules, Congress often has avoided the pain of strict budgeting on taxesthrough a combination of approaches that yielded technical revenue-neutrality within the window for which estimated were made, but that, in fact, produced longer-term budget challenges.
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These include:
- Delayed or phased-in benefits such as the 1986 rate reductions,
- TTemporary benefits such as the R&D tax credit that must be renewed and paid for repeatedly,
- Longer periods over which deductions are taken without changing the amount eventually deducted, such as lengthening of recovery periods under the 1986 Act, and
- One-time additions to income created by changes in accounting methods.
A fifth approach, that is used more rarely, is the imposition of a temporary tax.
These approaches made the Tax Reform Act of 1986 Act less of a model for tax reform and more a caution. That Act was estimated to be revenue-neutral over the five years for which estimates were prepared. It was estimated to cut about $530 billion in taxes while raising essentially the same amount in tax increases. A combination of delayed or temporary benefits and one-time income inclusions; however, virtually guaranteed the revenue challenges that emerged in years outside of the period for which revenue estimates were given. It was anything but revenue neutral over the long term. Of course, Congress could, and did, partially address the resultant fiscal challenges with spending cuts. But, it also enacted the 1990 and 1993 tax increases in response to post-1986 budget deficits.
Unfortunately, current legislative proposals underscore the possibility that the next business tax reform will be structured using these same kinds of short-term approaches. If it is, then future Presidents and Congresses will be required to make additional spending cuts or to undo reform by increasing taxes, just as they did after the 1986 act. Three examples from the current debates reinforce this concern.
First, the largest commonly discussed reform of business tax expenditure is a proposal to lengthen depreciation periods. This would defer capital cost recovery and increase income in the near-term. The tax increase effect would decline over time as deferred deductions were claimed in later years.
Second, repeal of the last-in first-out (LIFO) inventory method had been repeatedly proposed. As with any accounting method change, the permanent impact on federal revenue would come from the resulting accounting adjustment. With Congress now estimating revenue impacts over a ten-year period, proposals to repeal LIFO now come with 8- or 10- year accounting spreads rather than the usual 4-year spread. With this kind of spread, the budget window is filled with significant revenue that will not be available in the years beyond the estimating period.
Third, the offshore deferred income of U.S. multinationals has become a tempting source of funding for other reforms. Proposals to trigger a mandatory deemed repatriation that would generate temporary taxes while funding permanent tax reductions.
Buying business tax reform on the cheap with temporary tax increases paying for permanent benefits might seem to be the most affordable current option. If we choose that path, however, then like the owner of a cheap thermometer, we should be prepared to invest in the future when it breaks yet again.
