Tax Cuts: Here Today, Gone Tomorrow
In the 1987 movie Moonstruck, when Loretta Castorini shows her father the engagement ring she has just received, Cosmo Castorini disparages the bauble: He can see that it's her fiance's pinky ring, given to her in haste because the guy forgot to buy the real thing. "It's temporary!" Loretta yells at her father. "Everything is temporary!" Cosmo thunders back.
Plow through the 575-odd pages of tax provisions in the stimulus bill signed this week by President Obama, and Cosmo's declaration will keep coming back to you. What Congress giveth in the way of tax breaks, Congress also taketh away, in most cases in just a year or two, or even less.
The home-buyer credit disappears at the end of November. The new above-the-line deduction for sales tax on purchases of cars, SUVs and other vehicles dies after 2009. The payroll tax credit exists only for 2009 and 2010. The souped up HOPE credit for college expenses expires after this year. Expansions of the earned income tax credit and child credit go away after next year. And on and on.
It's not surprising that some of the goodies written into the tax code aren't permament. After all, Obama and Congress are trying to jump start the economy. Once it gets rolling, people won't need those extra incentives to buy a house or a car, right? But for other breaks, it's not clear what kind of tax policy Congress was after. Why should the Earned Income Tax Credit, the child credit or the credit for higher education shrink back to earlier levels after just a year or two? The answer has little to do with common sense policy and everything to do with lawmakers trying to keep the final price tag of the bill down as much as possible.
And yet it remains to be seen how temporary all these easings will turn out to be. When it comes to tax breaks, expiration dates have a funny way of getting moved. Take the research and development tax credit: Since its enactment in 1981, the credit has been extended 13 times, often just for a year or two. Currently, the credit is scheduled to sunset after Dec. 31, 2009.
But the easings in the stimulus bill are just part of the story. There's an even bigger day of reckoning for temporary breaks that looms on Obama's watch: The 35% top individual income tax rate and the 15% maximum rate on capital gains and dividends, along with marriage penalty relief and the larger child credit, all go away after 2010. And the estate tax, which is abolished under current law in 2010, is set to come roaring back in 2011 with a top rate of 55% and an exemption amount of just $1 million.
In Moonstruck, Loretta gives up the pinky ring, not in exchange for a nicer ring, but for a completely different (and presumably better) husband. It's not hard to see how Washington policymakers could opt for something just as dramatic to help them dig their way out of the expiration quagmire next year: A complete realignment of the tax code, on the scale of the Tax Reform Act of 1986. Stay tuned.