Tax Policy is MIA in the State of the Union

By :: January 29th, 2014

When it comes to tax policy, President Obama’s State of the Union address last night was a model of modesty. There was little new. And, while it is always hard to tell what really matters in a speech that included more than 40 separate initiatives, the president showed little enthusiasm for broad-based tax reform.

With the exception of his continued interest in immigration, the speech was almost Clintonesque in its collection of small-bore, feel-your-pain initiatives. That was certainly true when it came to taxes.

The one exception: A potentially important initiative to expand the Earned Income Tax Credit to low-wage workers who do not have children. Currently, while some childless adults are eligible for a modest credit of up to $500, the nation’s biggest tax-based income support program largely benefits only households with kids.  My Tax Policy Center colleague Elaine Maag has written extensively about this idea. Yesterday, she blogged about a similar idea offered by Sen. Marco Rubio (R-FL).

The president perfunctorily restated his support for business tax reform but added no new twist to make his plan any more acceptable to congressional Republicans. His idea: Eliminate tax “loopholes” and use the money to cut rates and—briefly—finance some new infrastructure spending.

Obama’s language was not helpful if he’s serious about his plan. As long as he continues to pretend that substantial business rate cuts (or infrastructure spending, for that matter) can be funded by eliminating “loopholes,” the president is doing little to advance the reform debate.

As he, and his GOP adversaries, well know—but won’t say—significant business rate cuts are impossible without fundamentally restructuring the bedrock credits, deductions, and other subsidies that are at the heart of the tax code.

Firms have built their business models to take advantage of these preferences. Significantly reducing rates requires changing the way companies manage their capital investment, inventories, foreign income, and debt financing. It is not helpful for the president to continue to describe them as “loopholes” as if they are nothing more than hyper-technical, unanticipated cracks in the Revenue Code.

What other changes in the tax code did Obama propose?

There are a couple of new ways to restructure retirement savings. Obama will create a new myRA (shorthand for my retirement account) to encourage working people to begin savings through Roth-type Individual Retirement Accounts. In a fact sheet accompanying the speech, the White house said Obama would also propose reducing tax benefits for retirement accounts for high-income households.

The president will also propose a new tax credit for alternative energy biofuels--a bit of what my Tax Policy Center colleague Gene Steuerle likes to call tax “deform.”

Finally, the president’s speech was notable for what it did not say. Reducing the budget deficit and reforming entitlement spending for programs such as Medicare, Medicaid, and Social Security seem to have fallen off his radar screen.

In sum, the speech plowed little new ground. Big changes in tax policy, it seems, will wait until after the 2014 elections and, quite likely, until the White House has a new occupant in 2017.

 

 

7Comments

  1. Tax Roundup, 1/29/14: E-cigarette panic! And: SOTU, SALY. « Roth & Company, P.C  ::  9:53 am on January 29th, 2014:

    […]  Tax Policy is MIA in the State of the Union (Howard Gleckman, TaxVox). “The president perfunctorily restated his support for business […]

  2. Jack Gallagher  ::  12:27 pm on January 29th, 2014:

    Good to see some recognition of the President’s general level of un-seriousness regarding tax reform.

  3. Michael Bindner  ::  4:47 pm on January 29th, 2014:

    President’s who have achieved their tax reform goals seldom make new proposals. Did Reagan make any proposals after the 1986 Act? Probably only technical corrections (too bad he did not correct second mortage interest deductibility – it may have stoped the 2008 crisis). When the ATRA passed on January 2, 2013, I suspect a Mission Accomplish banner was hung at the Treasury Department (or should have been). There will be no broad reforms by this White House.

    The EITC could be expanded to include a version of the Making Work Pay Credit, but at some point we need to ask whether it is up to taxpayers to subsidize low wage labor (and consumption of low wage made goods – like movie popcorn or chicken nuggetts) or whether it is time to call for an increased minimum wage – which Obama did call for – although $10 is not nearly enough.

    As for funding highways and related infrastructure – there is a way to do that well – increase the gasoline tax (or at least include automatic increases for inflation). Of course, until the states demand such a thing, including the ALEC dominated red states, such an increase will have to wait not for a new president – but unacceptable deterioration of roads and bridges.

  4. AMTbuff  ::  6:11 pm on January 29th, 2014:

    “It is not helpful for the president to continue to describe them as “loopholes” as if they are nothing more than hyper-technical, unanticipated cracks in the Revenue Code.”

    How true. Some advocates of tax reform like to use the term “loophole” as a way to win public support. That tactic will become self-defeating when the public realizes that the term is a lie.

    The public correctly defines a loophole as an unintended tax benefit exploited by companies and individuals through complex maneuvering. No normal taxpayer sees himself as exploiting a loophole when he accurately states his property tax payments on the Schedule A line labeled “Real estate taxes”. That’s the intended use of the tax law. It’s no more a loophole than choosing to buy toilet paper when it’s on sale.

    Support for “loophole closing” tax reform will vanish when the public learns that its favorite tax benefits have been deceptively mislabeled as “loopholes”. The public has little tolerance for intentional deception. I call it a lie because that’s how the public will see it, no matter what tax experts think.

    Misuse of the term “loophole” will backfire badly, harming the cause it was intended to help.

  5. Vivian Darkbloom  ::  7:10 am on January 30th, 2014:

    Thanks. It’s refreshing also to see Gleckman take up the issue. Why the media and particularly the specialist media pander to this obvious rhetorical and unhelpful gimmick is very puzzling to me.

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