Sunsets in the Tax Code

Peter R. Orszag and
Peter R. Orszag Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard
William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

June 9, 2003

The negotiations and debate leading up to the recent conference agreement highlighted the role of “sunsets” in tax policy. Sunsets are provisions of the tax code that expire at some given date. In this paper, we examine the role of sunsets in tax policy. The first section reports trends in tax policy sunsets. The second section discusses issues raised by sunsets. Principal conclusions include:

  • Sunsets have long been a feature of the tax code, but they have traditionally involved relatively minor provisions. The 2001 tax cut involved a dramatic departure from this history, by including a massive sunset at the end of 2010. The aggressive use of sunsets has continued since then.
  • If all of the temporary provisions in the conference agreement were extended, the 10-year cost would be $1.09 trillion, more than three times the official $350 billion revenue estimate.
  • Removing all of the sunsets in the tax code, including those in the recent conference agreement, would involve a revenue loss of almost $2 trillion over the next 10 years. This is roughly as large as the official costs of the 2001, 2002, and 2003 tax cuts combined. Including the added interest payments, the implied increase in the budget deficit from removing all sunsets in the tax code would amount to $2.3 trillion.
  • The 10-year figures understate the potential magnitude of removing the sunsets because the costs rise dramatically over time. The revenue loss in 2013 alone would amount to $430 billion, or 2.4 percent of GDP.
  • Whether sunsets make for good tax or budget policy depends on a number of factors. Sunsets are clearly appropriate for tax incentives that are designed to be—and should be—temporary.
  • Sunsets on provisions that are intended to be permanent, however, raise more difficult issues. For a tax cut of a given annual magnitude, a sunset provides some degree of flexibility to policy-makers in the future. But the sunset may increase the underlying size of the annual tax cut in the first place, by allowing a larger annual tax cut to fit within a given multi-year budget total. This is clearly the motivation for the massive recent increase in sunset provisions, which is why many observers are concerned about their use. Sunsets that are used to increase the underlying annual size of a tax cut leave policy-makers in the future with less flexibility than they would otherwise have, since allowing sunsets to take effect is likely more difficult than forgoing new tax cuts in the future.
  • Some observers have criticized sunsets for creating uncertainty in the tax code. Frequent changes in the tax code are indeed undesirable. The sunsets, however, are just the most obvious manifestation of the underlying uncertainty surrounding the tax code. The fundamental source of that uncertainty is the long-term fiscal gap facing the nation.
  • As sunsets have come to dominate the tax code, the official budget projections have become increasingly divorced from reality. CBO should prominently include, in every major budget analysis, baseline projections assuming that temporary tax provisions continue. CBO treats spending provisions that expire as though they will be granted a continuance and should do the same for tax provisions.
  • Policy makers could usefully consider changing the budget rules to address sunsets more aggressively.