Not Yet Time to Break Out the Champagne

Those of us who have spent much of our careers in Federal tax policy offices have reason this week to feel vindicated. While the two political parties could not be further apart in their ideologies and their views about the proper role of government, the budget resolutions in both the Republican House and the Democratic Senate have taken a firm stand in favor of reducing special tax breaks.

The House Ways and Means Committee, in a letter signed by all its Republican members to Budget Committee Chairman Paul Ryan, states its intention to “make the tax code fairer by scaling back preferences that distort economic behavior and often benefit only a narrow group of individuals and businesses.” These cuts in preferences will be needed to meet Chairman Ryan’s goal of a tax code that raise the same revenue as current law with sharply lower individual and corporate rates.

The Democrats’ Senate Budget Resolution calls for “deficit reduction of $975 billion to be achieved by eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations.” This consensus on the need to reduce tax breaks is truly extraordinary.

Tax wonks should celebrate this new development. For years, we have fought against proposals by politicians of both parties to lard the tax code with more special credits, deductions, and exemptions for supposedly worthy purposes. We have argued that these preferences make the tax law more complicated, distort economic choices, create unfairness in the treatment of taxpayers with equal ability to pay, and produce a general public cynicism with the income tax system. We have called the preferences “backdoor spending” or “tax expenditures” and argued that many of them would not stand up to scrutiny if introduced as direct spending programs.

With the notable exception of the Tax Reform Act of 1986, we have become accustomed to losing one battle after another.  And we have become resigned to defeat, explaining why politicians prefer tax breaks over direct spending and why that’s not always such a bad thing

Now both parties appear to be coming around to our long-held point of view. But there’s still a big problem: With the exception of a reference to benefits for corporate jets in the Senate’s resolution, there is no mention of a single tax benefit that the Committees would eliminate. And most of the money from tax expenditures comes from popular and widely used provisions, such as the exemption of employer benefits for health care and the home mortgage interest deduction.

The Senate Democrats do suggest some type of across the board limit on tax expenditures claimed by high-income taxpayers, an approach Governor Romney also discussed in the presidential campaign and Republican economic advisor Martin Feldstein promotes. But both sides have yet to identify the specific preferences they would remove to reach their revenue targets.

So I’ll keep the champagne bottle corked. Until the tax-writing committees offer specific proposals, we may only be seeing the tax side equivalent of familiar promises to control spending by eliminating “waste, fraud and abuse.” And, of course, Congress will have a hard time judging as wasteful any tax break that benefits a mobilized constituency. But we can still hope.