Addicted to Crisis: How the Payroll Tax Deal Explains Washington

The two-month payroll-tax-cut extension is the latest reminder that making policy for astoundingly short periods of time is embarrassing for government, confusing for businesses, and bad for everyone

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Every December, Congress faces a dwindling calendar and a pile of unfinished business. And every year, stuck somewhere deep in that pile, sits a packet of expiring tax provisions that show up again and again. The result: a second, quasi-permanent tax code that costs billions of dollars and slowly distorts the processes of building a coherent federal budget.

The hotly debated payroll-tax deduction, scheduled to return to its full 6.2 percent after Dec. 31, is just one of 67 expiring tax provisions--worth $300 billion or more--that are waiting to be swept into a behemoth package of renew-this-now legislation that President Obama signed just before his holiday vacation. Such last-minute measures have become a perennial problem as lawmakers fight over which tax programs to extend. The usual answer: all of them.

The culprit is the lawmakers' shrewd manipulation of the budget process. Increasingly, they prefer to impose a short time frame on tax provisions that would otherwise look too costly or controversial to append permanently to the nation's tax code. This way, they can offer popular benefits, such as a tax credit for research and development or a deduction for mortgage insurance, while valuing the cost over a year instead of a decade. Members of Congress can thus keep pet legislation on the books without having to justify the long-term expense. It also lets them play down a provision's true costs, because the Congressional Budget Office applies easier rules in estimating the costs of short-term programs.

But the unintended costs of this legislative evasion are mounting, according to Ryan McConaghy, the director of the economic program at the centrist Democratic think tank Third Way. Among voters, the repeated renewals create a perception of permanence. "Once you have a benefit going and it gets popular, it is always tough to roll back," McConaghy said.

Some of these annually renewed provisions now rank among the most expensive tax programs in the federal code. In 2010, lawmakers approved an $858 billion package to extend the Bush-era tax cuts and rein in the alternative minimum tax for another two years and also to continue a multitude of tax provisions--including a payroll-tax "holiday"--for one year. That was many times the cost of the largest permanent tax expenditure in 2008: $131 billion to exclude employer contributions from medical insurance premiums and care.

Governing for the short term only has long-term costs

Even worse, these supposedly temporary revenue measures obscure the U.S. fiscal outlook, because CBO number crunchers aren't permitted to take political reality into consideration when they make their projections. Every year, budget and deficit forecasts are adjusted and altered from a baseline that, by design, ignores benefits due to expire, even if everyone on Capitol Hill knows that Congress will keep those benefits alive. "According to the law, CBO identifies their baseline, but everyone still knows that [other changes are] going to happen," McConaghy said. "It muddies the budget picture."

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