Congress is on the verge of passing a tax cut plan that would prioritize tax breaks for corporations over middle-income and low-wage working parents, while significantly increasing the federal deficit. As the New York Times reported, President Obama has threatened to veto the bill if it reaches him in its current form.

The bill in question is referred to as “tax extender” legislation, which comes up on a regular basis as the start of the next tax year approaches. In his On the Economy blog, Jared Bernstein describes this annual process as follows:

“Tax extenders are a series of allegedly temporary tax breaks that are conventionally extended, unpaid for, year after year. These include tax credits for research and development, expensing deductions for small businesses, deductions for state and local sales taxes, and more. To put them in the annual budgets that Congress and the President construct each year would mean they’d either have to be paid for with higher taxes or spending cuts elsewhere or added to the deficit. So the usual practice is to just extend them by stealth every year and hope nobody notices.”

An analysis of the bill by Jared’s colleagues at the Center on Budget and Policy Priorities (CBPP) raises a number of concerns about the bill’s fiscal impact and its priorities. The CBPP analysis says the extended tax breaks, some of which would be made permanent or enlarged, would do the following:

• … undo more than half of the revenue raised by the “fiscal cliff” legislation at the end of 2012, and would consequently result in the overwhelming share of the deficit reduction achieved since 2010 — more than 85 percent of it — coming from budget cuts, with little net revenue savings.
• …with congressional Republicans insisting that future congressional budget resolutions balance the budget in ten years without new revenues, the extenders package would increase pressure to cut domestic programs more deeply.
• Two-thirds of its more than $400 billion in tax benefits would go to businesses, and it doesn’t continue the two temporary tax provisions most important for reducing poverty and increasing opportunity among low-income working families with children …the Earned Income Tax Credit (EITC) and the low-income component of the Child Tax Credit (CTC.
• By making a slew of the tax extenders permanent while excluding the CTC and EITC provisions, the package risks stranding those provisions and making it less likely they will continue beyond 2017.

The CBPP analysis says that allowing the CTC and EITC provisions to expire would have a number of very negative effects, including the following:

• More than 16 million people in low-income working families would be pushed into, or deeper into, poverty.
• Some 50 million Americans overall with modest incomes — including 31 million children — would lose part or all of their EITC or CTC and see their after-tax income go down.
• The effects would be particularly sharp on families raising children on minimum-wage earnings. A single mother raising two children on full-time, minimum-wage earnings of $14,500 would lose her entire CTC of $1,725.

The NY Times article indicates that the threat of a veto, which would be just the third by Obama, “sent negotiators back to the table to see if Republicans could add measures that would win liberal support.” Although the extenders bill already has the support of Senator Reid and some other Democrats, it doesn’t have enough support to override a veto.

The political jockeying over this bill will be very interesting. The NY Times article calls it a “high-stakes game of chicken” because the bill extends 55 tax breaks for businesses and individuals that are scheduled to expire on Dec. 31. Not passing a bill by the end of the year would create a mess for tax planning purposes, as we saw during the impasse on the fiscal cliff. But Republicans will control the Senate next year and will have a larger majority in the House, which reduces their willingness to compromise. As a result, one potential outcome is that there is simply a one-year extension of all the tax breaks, followed by a new battle over the bill next year.

Although the President will be under a lot of pressure to reach a deal with GOP leaders, I think he will dig in his heels because the size of this tax cut package would cause far larger spending cuts in the years to come than the deep cuts already necessitated by past deficit reduction bills. I suspect the President will continue to make the case that it’s hypocritical of Congress to ignore the red ink caused by tax cut bills while legislators are making more plans for reducing the federal deficit.

Let’s put off making the tax cuts permanent until there’s an informed debate about the nation’s budget priorities, because it’s irresponsible to make those tax choices separately from decisions about federal spending. Tax and spending choices need to be on the table at the same time as lawmakers and the general public weigh the pros and cons of different budget choices and as Congress sets the parameters for the amount of deficit reduction in the coming years.

From www.wisconsinbudgetproject.org.