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Saturday, June 5, 2010

Increasing attention on tax exenditures (and interesting, but good, irony in HR 4213)

I've seen a few articles and reports lately on the need to examine, reduce, and bring greater attention to a form of government spending that doesn't show up in budgets - tax expenditures.

(1) A 5/25/10 article in the LA Times - "Oil companies have a rich history of U.S. subsidies" doesn't offer lots of details, but reminds readers that the government (that is - us) subsidize a lot of oil company drilling and exploration through direct spending and favorable tax breaks.

(2) The Center for American Progress issued a very good report in April - Audit the Tax Code - Doing What Works for Tax Expenditures. It points out that direct government spending which we can see as line items in some government agency's annual budget and spending hidden in the tax system (via tax deductions, credits and exemptions) achieve the same purpose. However, the tax expenditures are hidden. They do not get annual review and can easily grow and do grow. The author notes:

"The cost of tax expenditure programs has skyrocketed over the last two decades. Last year, spending through tax expenditures totaled over $1 trillion—significantly more than all nondefense discretionary spending. This year, tax expenditures will make up nearly 25 percent of total government spending."

(3) Bruce Bartlett's Forbes article (5/10) - see blog post here.

(4) On June 9, 2010, the CA Senate Revenue & Taxation Committee will consider two bills related to tax expenditures:
(a) AB 2564 - this bill just moves up the date that the California Dept. of Finance is to release its annual report on tax expenditures - from 9/15 to 2/1 and to provide it directly to any legislator who requests it. This is a great idea as it better enables the information to be useful when lawmakers are finalizing the state budget. I'd like to see the bill go further and require that the report be given to all lawmakers, issued in press releases, a YouTube video made summarizing it, and a presentation on it be made to both houses of the legislature.
(b) S.B.X.6. No. 19 - is designed to bring greater transparency to just a few tax expenditures. The bill would "require the Franchise Tax Board to annually compile specified information relating to a corporation receiving credits of $20,000 or more, allowed from corporate tax expenditures, as provided. The bill would require the board to include the information in the California Income Tax Expenditure Report and on the state transparency Internet Web site." This is a start in increasing transparency, but is too limited and may cause some people reading the information to think that only corporations get tax breaks when most are directed to individuals. It would be better to publicize all tax expenditures, breaking them down by type of taxpayer (individual or corporation) and by income category (or for corporations, asset size).

(5) H.R. 4213 - the American Jobs and Closing Tax Loopholes Act of 2010 includes a little publicized provision which states:

"Findings- Congress finds the following:
(1) Currently, the aggregate cost of Federal tax expenditures rivals, or even exceeds, the amount of total Federal discretionary spending.
(2) Given the escalating public debt, a critical examination of this use of taxpayer dollars is essential.
(3) Additionally, tax expenditures can complicate the Internal Revenue Code of 1986 for taxpayers and complicate tax administration for the Internal Revenue Service.
(4) To facilitate a better understanding of tax expenditures in the future, it is constructive for legislation extending these provisions to include a study of such provisions."

Well, good for Congress! It is about time they make such findings. Of course, it is telling and ironic that the above statement appears in a bill extending numerous tax expenditures that for the most part have not been reviewed and without discussion as to whether they are needed or whether we can afford them!

The report required would be more detailed than what the Joint Committee on Taxation is currently required to submit. I encourage you to take a look at the details in Section 272 of H.R. 4213.

As I've noted a few times in articles and this blog, additional problems with tax expenditures:
  • When lawmakers look for spending cuts to address budget shortfalls, tax expenditures are typically ignored despite their significant size and the reality that many are not needed (such as deductions for interest on a debt on a second home or a home equity debt).
  • When elected officials, impose spending freezes, they don't apply to tax expenditures, which makes the freeze somewhat pointless, as noted in the quote above from the Center for American Progress.

Let's see if anything comes of the new attention and even legislative effort to more closely examine tax expenditures. They are growing out of control and state and federal budget sanity depends on bringing them into a bright spotlight and under control. And public education is needed so that taxpayers see and understand the government spending directed to them via tax breaks (i.e., subsidies).


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