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How the “Bipartisan” Budget Deal Starves the Beast

It's another boon to Republicans’ long-term project to shrink the government to a bathroom-drowning size.

Susan Walsh/AP

The biggest political spin room on Tuesday night was not in Las Vegas for the Republican debate, but in the corridors of Congress, with Democratic and Republican leaders alike justifying the massive year-end spending and tax bill as a victory for their side. The real winner, however, appears to be the Grover Norquist-style principle of “starve the beast,” the idea that you can endlessly cut taxes as a pretext to crying poor about funding for government services. 

The final deal has two major parts. One is an omnibus appropriations bill, the spending levels of which were set out in late October. Then there’s a “tax extenders” package, estimated at between $650 and $670 billion, the majority of which goes to tax breaks for corporations. None of those tax extenders is paid for, even while very miniscule increases in spending programs, like the $4.6 billion reauthorization of the Zadroga Act for 9/11 first responders’ health needs, must have a funding source.

You can see the inequity here: Every inch of spending on programs must be accounted for and offset, while spending through the tax code is magical, and need not be offset at all. Lawmakers certainly get the message—it’s simply easier to cut taxes than create new programs. And eventually, conservatives can use this dynamic to decry the “runaway deficit” and demand spending cuts. This is how you drown government in a bathtub.

Not every new tax cut benefits corporations: There is some good news for working families as well. Stimulus-created expansions of the Earned Income Tax Credit, Child Tax Credit, and American Opportunity Tax Credit (for college students) will be made permanent, without stringent eligibility requirements proposed by Republicans that would have made it harder for recent immigrants to legally access benefits. That adds up to about $200 billion in benefits for individuals over 10 years.

But that’s dwarfed by the tax breaks for corporations and the wealthy in the bill, which in sum equal about $470 billion. Some of these breaks, like a permanent research and development tax credit ($110 billion), are relatively anodyne. But the “active financing exception” ($78 billion) enables financial institutions to defer taxes on income earned outside the United States. This creates incentives for accounting tricks to make it look like interest, dividends, or other income comes from overseas. It effectively legalizes foreign tax havens. 

Another break, the “look-through” rule ($8-$11 billion), lets multinational corporations shift profits to tax havens without triggering payment of U.S. taxes. That rule and “bonus depreciation,” an immediate deduction for business equipment, are only extended for five years. But that’s misleading: By putting their deadline further out than the usual array of “tax extenders” (a grab bag of tax breaks only extended to 2016 and seemingly doomed after that), it virtually ensures that these tax breaks will be perpetually extended, even if the others go away.

The deal paused Obamacare taxes for health insurers (one year) and medical-device manufacturers (two years). The latter was sadly a bipartisan affair, as liberals in states with medical-device suppliers, like Amy Klobuchar, Al Franken, and Elizabeth Warren, supported repeal. Unions also got a boost with a two-year delay in the “Cadillac tax” on high-end insurance plans. (It’s likely that tax will never be implemented. Unions believe it penalizes insurance that they negotiated for in labor agreements, and they question the prevailing wisdom that taxing good insurance plans will curtail health-care cost growth or increase wages.)

The big fear with the omnibus was that Republicans would attach ideological policy “riders” to the must-pass bill and dare the President to reject them, therefore shutting down the government. In the end, only a handful of the hundreds of proposed riders got through. But they are significant. 

In the first major piece of legislation to pass after the historic Paris climate deal, the omnibus will lift the 40-year-old ban on domestic oil exports. Not only does this bail out a sick domestic oil industry by opening up new markets, it over time incentivizes nationwide oil drilling—exactly what the climate deal purports to prevent. Democrats claim that they offset this impact by getting five-year extensions of solar and wind-energy tax credits, but as green groups noted in a letter last week, trading off investments in renewables with incentives for fossil fuels just cancels out the climate gains and makes reaching clean-energy goals harder.

The omnibus also prevents the Securities and Exchange Commission, the Internal Revenue Service, and the White House (by executive order) from writing rules that force the disclosure of political spending by corporations. This preservation of dark money, according to election law expert Rick Hasen, leaves the public without the information it needs about who is trying to buy their elections.

In a portent of the impact of trade agreements like the Trans-Pacific Partnership, the omnibus also eliminates the country-of-origin labeling requirement for meat and poultry, meaning that consumers will no longer know where their flank steak or chicken breast comes from. Canada and Mexico alleged that this law violated past trade agreements, and successfully won a claim at the WTO for $1 billion in trade sanctions. Rather than pay up, Congress will repeal the law. So when the Obama Administration says that trade deals cannot change U.S. law, remember country-of-origin labeling.

Other riders that made it through have negative consequences for privacy, health care, and financial regulation. They include: 

  • changes to the “visa waiver” program that will institute additional screening of foreign visitors;
  • halts to Obamacare “risk corridor” payments designed to help insurance companies manage their subscriber pools;
  • an entire cybersecurity bill that critics charge will increase government surveillance;
  • exemptions from Dodd-Frank regulations for certain derivative swap trades;
  • an NRA-supported prohibition on the United Nations Arms Trade Treaty that regulates trade in conventional weapons;
  • and a restriction on the Treasury Department’s sellling of preferred stock in Fannie Mae and Freddie Mac until legislation passes to clarify their future (or, if you believe a recent New York Times series, until they are liquidated and sold off to Wall Street).

About the best thing you can say about this deal is that it could have been a lot worse. Most of the riders were left out, and tax breaks for working families, and for solar and wind, were stuck in. Two terms’ worth of White House policies—on power plants, labor relations, and fiduciary duties for investment advisors, to name just a few—were untampered with. 

In an era of Republican congressional dominance, a merely distasteful rather than horrid deal almost counts as a Democratic victory. But that doesn’t make it good policy. On Wednesday, Nancy Pelosi called the tax-extenders bill “practically an immorality.” And the omnibus makes increased hydrocarbon exploration, electronic surveillance, dark money, and consumer ignorance over the origins of their food part of the price of keeping the government running. Moreover, the philosophy of requiring new spending to be “paid for” and letting tax cuts go untouched empowers right-wing theories of government.

You can chalk this up to a series of Republican election victories that have led to tangible results for their priorities. It’s de rigeur to say that Congress is dysfunctional and gets nothing done, but it’s also untrue. Elections have consequences, and they are very evident in this year-end deal.