Heritage: Permanently extending tax cuts would boost the economy

The Heritage Foundation released a new paper on Monday arguing that making temporary provisions of the new tax law permanent would boost the economy.

“By simply expanding and making permanent the changes that Congress has already agreed to in the [Tax Cuts and Jobs Act], lawmakers could double the benefits of tax reform for their constituents,” Heritage analysts Adam Michel and Parker Sheppard wrote in the paper.

The paper comes ahead of a House Ways and Means Committee hearing on the tax law scheduled for Wednesday.

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The law permanently cuts the corporate tax rate from 35 percent to 21 percent but includes a number of other provisions with expiration dates. GOP lawmakers made many of the provisions in the tax law temporary in order to comply with budget rules that allowed the measure to pass the Senate with only a simple majority.

The law’s tax cuts for individuals and pass-through businesses expire after 2025. The law’s provision allowing businesses to immediately deduct the full cost of short-lived capital investments, known as full expensing, phases out after five years.

Republican lawmakers are considering voting this year on legislation to make the temporary tax cuts permanent. While such a bill is unlikely to get enough votes in the Senate to pass, GOP lawmakers think it would be good policy and would force Democrats to go on the record ahead of the midterm elections.

Michel said the paper is focused on the economic case for permanently extending the tax law’s provisions.

“Temporary provisions don’t increase GDP to the extent that permanent ones do,” he told The Hill.

Heritage, a conservative think tank, estimates that the tax law in its current form will increase long-run gross domestic product (GDP) by 1.67 percent, compared to a pre-tax law baseline. But if the law’s temporary provisions are made permanent, the law would increase long-run GDP by 2.75 percent compared to a pre-tax law baseline.

In other words, making the temporary provisions permanent would increase the tax law’s economic benefit by about 60 percent, Heritage said.

Lawmakers could boost economic growth even more if they also expanded expensing, Heritage said.

For example, if the tax law were made permanent and full expensing were expanded to all investments, the law would boost long-run GDP by 4.27 percent compared to the pre-law baseline — increasing the benefit of the measure by about 150 percent compared to the benefit of the law in its current form.

Some GOP lawmakers have been hesitant to back a permanent extension of the tax cuts because doing so would further increase the debt.

The Heritage analysis didn’t look at the revenue impacts of making the cuts permanent, but Michel acknowledged that doing so would reduce federal revenues. However, he also said the additional economic growth would help to offset part of the cost.