'Tax expenditures' -- unsung villain of the budget battles

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The Seattle Times
By: Neal Peirce
April16, 2011

"Don't tax me" rhetoric ricocheting around Washington and the state capitals are all missing a huge point, writes Neal Peirce. It's "tax expenditures" -- the vast sums in deductions, exemptions and credits built into the tax codes but mostly immune from federal and state budget debates.

Budget attacks, counterattacks, "don't tax me" rhetoric ricocheting around Washington and the state capitals: They're all missing a huge point.

It's the issue called "tax expenditures" -- the vast sums in deductions, exemptions and credits built into the tax codes but mostly immune from budget debates at the federal and state levels.

But there may be some good news, at least at the state level. A prime example is Minnesota state Sen. Julianne Ortman. The Republican chairman of the state Senate's Taxes Committee is insisting on a tough new look at Minnesota's 296 special tax breaks, which range from a home mortgage interest deduction to sales taxes on clothing, charitable contributions to special credits for businesses that locate outside the Twin Cities.

Ortman is insisting, according to reports by The Associated Press and Stateline's Josh Goodman, that the tax breaks are really government programs in disguise: "We should be viewing each of these expenditures as a spending program, and we came here to review every single aspect of state spending."

Hard fiscal times are pushing the same agenda in several other states. Govs. Rick Snyder of Michigan and Neil Abercrombie of Hawaii want to end exemptions on pension income. Tax credits for firms that locate in distressed areas are being challenged by Snyder and Gov. Jerry Brown of California. Connecticut's Dan Malloy is targeting sales-tax exemptions ranging from pet grooming to cosmetic surgery.

The core problem is that tax expenditures run "below the radar," as critics put it. Taking the form of an exemption or credit incorporated in the tax code, they escape scrutiny, sometimes for years, no matter how expensive they may become. Some states have formal "tax expenditure budgets" to reveal the costs, but their benefits are hardly ever put up against outlays for schools, universities, infrastructure or other vital functions.

And the problem at the state level is even worse at the federal. National government tax expenditures doubled in number between 1974 and 2004, and the estimated revenue losses they triggered actually tripled. Washington now spends $1.2 trillion on tax expenditures -- more than half as much as it raises ($2.2 trillion) through the tax code, the Center for American Progress reports.

Included is close to $400 billion a year to help people build assets -- mostly through tax code breaks. It's a pool of benefits heavily skewed to help families of means build their wealth, rewarding them for the size of their homes and investment portfolios. By contrast, low-income families, who don't earn enough to itemize deductions, receive next to nothing from these strategies, the Center for Enterprise Development (CFED) reports.

The biggest federal tax expenditures in this "asset building" class were (fiscal 2009) $86.4 billion for the home mortgage deduction, $25 billion for deducting property taxes, $90 billion for reduced rates of tax on dividends and long-term gains, and $15 billion for excluding capital gains on sales of principal residences.

The bottom line for these tax breaks: the richer you are, the more you benefit. More than half the benefits, calculated by CFED with assistance from the Annie E. Casey Foundation, go to the wealthiest 5 percent of Americans. People earning more than $1 million a year receive, on average, more than $95,000 in tax benefits. Middle-income families get a few hundred dollars. The bottom fifth of taxpayers (incomes of $19,000 or less) receive about $5.

Omitted from this analysis is one tax expenditure program that does balance the scales to a degree. It's the earned-income tax credit for low-income families, first enacted in 1975, expanded significantly since, and now amplified by programs in 11 states, the District of Columbia, and even by some city governments.

President Ronald Reagan, in fact, called the earned-income tax credit "the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress."

But the $40 billion or so that the earned-income tax credit costs the federal government pales in contrast to the wealth-building tax breaks -- ample proof of the vast lead that the rich, armed with the cleverest tax accountants and obviously the best lobbyists, enjoy right now.

Can tax expenditures be curbed, or at least put onto a more level playing field? In one sense the picture's more discouraging than ever, with many of today's ascendant tea-party-brand politicians ready to damn any proposed curbs on tax breaks as tax increases -- which they pledge never to enact any time for any reason.

But there may be a silver lining. Today's bitter tax debates, together with the pressing need to restrain the federal deficit, are forcing legislators to look far more aggressively for savings, to assess government's overall fiscal future, than at any time since the Great Depression.

In the process, how could they miss, finally, taking a hard look at tax expenditures?

Neal Peirce's column appears regularly on editorial pages of The Times. His email address is nrp@citistates.com

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This page contains a single entry by CFED published on April 18, 2011 4:17 PM.

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