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Temporary Tax Cuts Can Wind Up More Permanent Than You Think

The federal budget is going from worse to worst. One year ago, the budget outlook included continuously rising deficits and an exploding debt. Last December, Congress passed and the president signed a partly temporary, partly permanent tax cut estimated to balloon that unsustainable debt by at least $1.5 trillion over the next 10 years.

Then early this year, our elected policymakers added a spending deal to pile on almost $700 billion more. Meanwhile, the Federal Reserve, fearing inflation, contemplates higher interest rates that will compound the Treasury Department cost of servicing that has swollen debt. But the fiscal self-abuse apparently is not over. We have not even had a chance to see whether the “supply-side” tax cuts will pay off, and already the talk in Washington is about “phase two” of tax cuts.

The latest tax cuts for middle-income households were temporary for two logical reasons. First, the tax bill faced a $1.5 trillion Senate rule cost limit over 10 years. Second, Senate rules also prohibited a net cost to the budget beyond the “budget window” of 10 years But those Senate rules are history for the 2017 tax cuts. Now, in theory, Congress can do anything it wants, provided it can get 60 Senate votes. But what if new legislation blows the budget deficit into outer space?

This whole scenario brings back pungent memories for those of a certain age. In 1981, Congress passed a big tax cut that was hoped to make revenues boom. Fans of the 1981 tax cuts were so excited that they immediately started planning for an even bigger “second bill.” But then revenues went down instead of up. The roof fell in on the budget, and the 1982 “second bill” became a tax increase, not a tax cut. Still, most of the 1981 tax cuts lived on.

In 2001, with a budget surplus, Congress passed another big tax cut. A few worry warts complained that this would throw the budget right back into deficit. “No need to worry,” the defenders cried. “The tax cuts are only temporary. If there are any signs of trouble, we will just let them expire.” But the roof fell in on the budget again, and there were new record deficits. The 2001 tax cuts did not reach expiration for another seven years, all were extended temporarily, then most were made permanent.

Tax cuts live beyond expiration dates, and beyond exploding deficits and yawning caverns of debt, for very simple reasons. Tax cuts are immediately built into family budgets. People put deposits on new cars and homes. Then beneficiaries of those tax cuts squawk at any suggestion that they will expire or be repealed. How will I make the payments?

Even business tax cuts for new investments made to expire expressly to incent owners and executives to “get them while they are hot” look like tax increases when it is time for them to go away. A small business investment tax break known as Section 179 was increased “temporarily” in 2003, expressly for this reason. More than a decade and at least nine acts of Congress later, that temporary tax break was made permanent, even bigger than when it started.

So right on cue, this Congress is talking permanent and even bigger tax cuts. It is not clear whether all the talk is on this level. Lawmakers will not pass a budget resolution, admitting to the all but certain big deficit would be just too painful. The resulting Senate hurdle of 60 votes to new tax cuts may be insuperable. Still, forcing the opposition to vote against tax cuts for Americans can be fun.

At the end of the day, even if the new tax cuts fail, the nation will be one day closer to the budget precipice. The markets will have one more case study to demonstrate that the responsible public authorities do not care, or at the very least are in no big hurry to do anything about it. If the deficit balloons as predicted, the tax cuts are supposed to expire. This time, we will see. But the track record is not encouraging.

Joseph J. Minarik (@JoeMinarik) is senior vice president and director of research at the Committee for Economic Development. He served as chief economist at the White House Office of Management and Budget for eight years under President Clinton. He previously worked with Sen. Bill Bradley (D-NJ) on his efforts to reform the federal income tax, which culminated in the Tax Reform Act of 1986. He is coauthor of “Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity.”