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Analysis: Long-haul effort seen for reforming tax breaks
June 28, 2011 / 1:21 PM / 6 years ago

Analysis: Long-haul effort seen for reforming tax breaks

<p>The National Debt Clock, which displays the current United States gross national debt and each American family's share, hangs on a wall next to an office for the Internal Revenue Service near Times Square in New York May 16, 2011. REUTERS/Chip East</p>

WASHINGTON (Reuters) - The desperate quest to get U.S. deficits under control has reformers looking at repealing some of the $1 trillion in special breaks scattered throughout the tax code but it could take years to end the favors.

Democrats are zeroing in on those tax breaks now, known as “tax expenditures,” so that domestic programs, such as education, law enforcement and healthcare, do not have to shoulder all of the burden of taming the nation’s $14.3 trillion debt.

They mainly are looking at benefits for the wealthy: tax breaks for corporate jets and for major oil and gas companies, as well as favors for hedge funds and households making more than $500,000 a year, for example, while not touching breaks for the less well off, such as the earned income credit.

But Republicans denounce any use of tax revenues to help reduce budget deficits, saying it is bad for the fragile economy and could not pass Congress anyway. An aggressive lobbying campaign has been deployed by special interests, too.

So, while a few of these tax breaks conceivably could be repealed as part of a deficit-reduction/debt limit increase deal approved by August 2, there is little expectation that a serious rewrite will happen before 2013 at the earliest, tax experts say.

Steve Bell, senior director of the Bipartisan Policy Center’s economic policy project, said he recently attended a meeting of tax specialists who work for private firms.

“What was interesting was the ferocity of various businesses against closing tax expenditures or loopholes,” Bell said in a telephone interview.

With such staunch opposition, “You’re not going to get any significant (tax) reform,” said Bell, a former Republican aide to the Senate Budget Committee. “They’ll kick the can down the road until after 2012. The only big fight next year will be on the Bush tax cut expiration.”

Enacted in 2001 and 2003, President George W. Bush’s tax cuts reduced income tax rates across the board. They are set to expire at the end of 2012.

ETHANOL PROGRAM UNDER SCRUTINY

Many in Washington had hoped that a vote in the Senate this month to repeal a $6 billion-a-year tax credit for ethanol blenders was a sign that policymakers finally were willing to do something about the special tax breaks that come with a $1 trillion annual price tag, according to some estimates.

“The days of placing spending programs in the tax code and giving them holy status are over,” Republican Senator Tom Coburn said just before the June 16 vote.

Coburn, who for many years has been trying to slay an ethanol tax credit seen as “low-hanging fruit,” may have been getting a little ahead of the game, though.

Within a week, deficit-reduction talks had come to a halt over tax policy and on Monday, Republican Senator Jon Kyl called the Democrats’ list of possible tax changes “the worst possible medicine for the ailing economy.”

But even the White House has been cool to repealing the ethanol tax subsidies, which are loved by the farm community but are being blamed for dramatically increasing the price of corn on world markets, and thus global food prices. The program, according to the Obama administration, needs to be reformed, not killed.

So, Democrats on Capitol Hill instead have tried to focus attention on repealing $21 billion worth of tax breaks to major U.S. oil companies, which earned $35 billion just in the first quarter of this year.

Meanwhile, many Republicans and Democrats are arguing that a review of broader tax expenditures, from the home mortgage deduction for individuals to the tax credit for charitable donations and various business deductions, must be left for a broad rewrite of the tax code. That effort might not get fully under way until 2013.

Congress’ Joint Committee on Taxation defines tax expenditures as “revenue losses” that allow “special” or “preferential” breaks to recipients.

WHOSE BREAKS WOULD GO? In a December 2010 report it took the joint committee pages and pages to simply list the various tax expenditures in the tax code.

Soldiers get an “exclusion of benefits” that will cost the Treasury an estimated $24.7 billion in 2010-2014, the Joint Committee on Taxation said, while holders of clean renewable energy bonds get breaks amounting to $600 million over the same time period.

Cattlemen, who say they do not get handouts from the federal government (never mind drought aid), receive $600 million in expensing costs for raising dairy cows and breeding cattle.

But among the really big-ticket tax expenditures that could significantly reduce annual U.S. budget deficits of around $1.5 trillion if they were repealed or modified are the deduction for mortgage interest ($484 billion price tag in 2010-2014) and the tax exclusion for employer-provided health insurance ($659.4 billion).

The deduction for state and local taxes costs an estimated $237.3 billion over five years, while reduced tax rates on dividends and long-term capital gains costs $402.9 billion.

Henry Aaron, a senior fellow at the liberal-leaning Brookings Institution, said that “the solution in many cases is not simply to junk” the tax breaks.

“Indeed, many of the objectives are worthy,” he said.

The tax deduction for charitable contributions -- estimated to cost $187 billion in 2010-2014 -- encourages individuals to support services provided by religious organizations, for example, “that are of enormous public benefit.”

What is hard to explain” Aaron said, is why a millionaire giving a dollar to charity could end up with a better tax break “than when a bus driver gives that dollar.”

In the end, Aaron said, it will take a comprehensive effort, maybe one modeled on the 2005 military base-closing program where the pain was spread so far and wide that everyone was willing to take the leap and lose something in the reforms.

Editing by Bill Trott

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