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Sunday, January 3, 2010

Accountability - Growing Attention, More Needed

An Associated Press story of January 2 (Babwin, "Cities, counties take back corporate tax breaks") notes how some cities are making use of "clawbacks" to reclaim tax breaks that did not yield the expected benefits for the jurisdiction.

I think this is part of what will be a growing trend amongst lawmakers and the public to ask questions about both direct spending and indirect spending that exists in the tax law (such as via special deductions, credits and exemptions).

There is another current article (1/3/10) in The Lexington-Herald Leader in Kentucky - "Tax breaks are budget loophole" by Blackford and Cheves. This story raises the question why consumers pay sales tax on DVDs but none is paid on the purchase of horses and coal. Per the article: The "state's General Fund is expected to collect about $3 billion in sales taxes during fiscal year 2010, compared to about $2.4 billion the state will forgo in sales tax breaks for horses, coal and dozens of other items."

The Kentucky article notes that a study on tax exemptions was authorized by the legislature in 2005, but never completed. It also notes that in 2008 the legislature failed to pass a bill that would have imposed sunset dates on exemptions and required public discussion on the provisions. The article notes that the dollar amount of exemptions is growing: "The money lost to tax breaks is rising about 7 percent a year as the General Assembly -- often at lobbyists' urging -- creates new loopholes in the tax laws without closing old ones."

Some states are considering or taking actions. I noted some actions in Oregon, Missouri and Florida in a 11/27/09 post. Oregon imposed sunset dates on many of its tax breaks which will require some discussion as to whether or not they should be renewed. Unfortunately, the legislators might not have the data they need to make such determinations because there was no specific call to either identify the objectives of particular breaks or call for collection of data needed to evaluate them.

Tax expenditures - deductions, credits and exemptions in a tax system that are not there for fundamental design reasons, but to provide some special benefit, are mostly hidden from lawmakers and the public. If there is no sunset date, they can remain in the tax law forever unlike line item spending that is likely to get reviewed each year. Also, these expenditures are rarely capped. Thus, unlike a budget line item, the tax expenditure can easily grow each year without offsetting revenues to cover the spending.

Ideally, special tax breaks should not be used. A tax with a broad base and lower rate best meets the principles of good tax policy. If a jurisdiction believes its economic, social and environmental health warrants some type of encouragement to some activity, it can be handled via a direct grant of funds. That allows for specific criteria for the award to be created, a dollar limit set and the public to have access to who received the funds. The tax law won't have to suffer the burden of the added complexity of special rules or their typical inequity (that is, a tax break to some is paid for by higher taxes for others).

It is great to see the news stories because that may cause the public to not only ask their elected representatives about spending in agency budgets, but also the spending that exists in the tax law. There are many puzzling tax expenditures in most tax systems and with rising budget shortfalls, it is past time to look at where that unnecessary spending can also be cut.

For more:

What do you think? Should tax expenditures be addressed in some way? How? Which ones? How can accountability be built into the tax and law-making systems?

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