Howard Gleckman is a Resident Fellow at the Urban Institute and editor of TaxVox. He is author of “Caring for Our Parents,” (St. Martin’s Press), a book on how we deliver and finance long-term care to seniors and adults with disabilities. He was formerly senior correspondent in the Washington bureau of Business Week, a Media Fellow at the Kaiser Family Foundation, and a Visiting Fellow at the Center for Retirement Research at Boston College.
Over the past week, three senior Washington lawmakers released foundational documents that describe both their agendas and their perspectives on government. On one level, they paint vastly different pictures. Yet, a close reading also pinpoints some surprising and important areas of agreement—more perhaps than the players would publicly admit.
President Obama’s fiscal year 2015 budget is hot off the presses. His tax and spending blueprint released today would boost revenues by about $1 trillion over the next decade, with the new money divided between funding new programs and reducing the deficit. As the president predicted in his State of the Union address, his budget focuses on improving the economic well-being of the middle-class. And he’d fund many of those initiatives by raising taxes on high-income households.
Obama’s plan also includes what he describes as a revenue-neutral business tax reform aimed at both small firms and big multinationals. The details of the proposal are not too different from what he laid out last year.
But Obama’s budget was not released in isolation. Yesterday, House budget Committee Chair Paul Ryan (R-WI) released a 205-page report on the federal government’s anti-poverty programs. It was, for the most part, a scathing criticism, though even it found a bit of common ground with Obama, especially when it comes to the Earned Income Tax Credit—which both like.
The document serves as something of a roadmap for Ryan’s future agenda. The Wisconsin lawmaker wants to be the next chair of the House Ways & Means Committee, which has jurisdiction over many of the programs he so dislikes. He’s also mentioned as a possible 2016 presidential candidate.
Yet, Ryan’s report was only a critique of existing programs. It made no recommendations on how to reform any of the poverty programs that Ryan believes have failed, though his upcoming budget plan may include some.
Finally, there was the tax reform plan House Ways & Means Committee chair Dave Camp released last week. Camp’s proposal, far different in tone and substance from Obama’s and Ryan’s volumes, was a painstaking, item-by-item rewrite of the tax code.
Whether you agree with his proposals or not, give Camp credit: For the most part he didn’t flinch from the dirty details. He identified exactly which popular tax subsidies he’d kill and described just how he’d do it. Unlike many recent tax reform plans, he didn’t hide behind the black box of unidentified “loophole closers.” He gored an entire herd of oxen and as a consequence has been largely abandoned, even by his own party leadership.
Yet Camp also shares common ground with Obama on a wide range of tax issues. Both back business tax reform and both would raise taxes on hedge fund managers. Both would cap the value of tax deductions for high-income families—Obama at 28 percent and Camp at an even less generous 25 percent. The two men would close a loophole that allows owners of personal service firms to dodge self-employment taxes. And both would pay for infrastructure spending with some temporary tax revenues they’d generate from rewriting business taxes.
This does not mean they are ready to sing kumbaya together. In important respects, Camp and Obama’s approaches to tax policy are vastly different. Obama wants to raise taxes overall and Camp wants to keep revenues the same as under current law. Obama would boost taxes on the rich while Camp wants everyone to pay roughly the same share of tax they do now. Obama wants to fund new spending. Camp does not (except for his infrastructure piece). Obama largely protects special interests favored by Democrats while Camp is not shy about zapping some GOP favorites.
And both men were constrained by political reality. Obama’s budget was written with the 2014 congressional elections in mind, which explains why he backed off proposals such as one to limit increases in Social Security benefits. Camp had to design a tax code that would raise roughly as much as current law and set a top individual tax rate of 25 percent. In the latter he ultimately failed, but it forced him to rely on an unsettling number of gimmicks to make it look as if he had met the goal.
Still, the plans show there is the potential for consensus in Washington on some narrow, but important issues. Not cosmic tax reform, perhaps, but meaningful change. There is a middle ground, even if few politicians are interested in playing on it.
Give House Ways & Means Committee Chair Dave Camp (R-MI) all the credit in the world for years of hard work developing his tax reform plan. Just don’t look too hard at the blueprint, which he released this afternoon.
On one level, it is a serious framework for reform. For individuals, it would consolidate and cut tax rates. According to the Joint Committee on Taxation, it would distribute the tax burden in roughly the same way as today’s law and raise about the same amount of money over the next decade. There is nothing magic about accomplishing either of these goals, but it is not easy to do and they provide a useful starting point for the reform debate.
However, the plan would get there through a combination of real cuts in tax preferences and an unsettling collection of gimmicks and fiscal legerdemain. And for a plan that is being billed as tax simplification, it is incredibly complicated—filled with phase-ins, phase-outs, surtaxes, and hidden tax rates.
Camp would eliminate the deduction for state and local taxes, cap the home mortgage interest deduction for loans in excess of $500,000, trim the Earned Income Tax Credit, end Head of Household filing, and repeal scores of smaller tax deductions and credits. These are real cuts in real tax preferences. And, whatever you think of their merits, Camp is finally taking the debate beyond the silly claim that rates can be cut be eliminating “loopholes.”
He’d also kill the Alternative Minimum Tax and redesign the taxation of capital gains and dividends. The first 40 percent of this investment income would be excluded from tax but the rest would be taxed at ordinary income rates. These too are important changes.
On the other hand, Camp claims he’s crunched the current seven-rate individual tax system to two rates 10 and 25 percent, a long-stated goal of many GOP leaders. But he really has three: 10 percent for single filers making less than $35,600($71,200 for joint filers), 25 percent for those making up to $400,000 ($450,000 for couples), and 35 percent for those making more than that.
But the story gets a lot more complicated—and more costly — for many households. For instance, the plan would repeal the personal exemption. It would significantly raise the standard deduction for most taxpayers but phase it out for high-income households. It would also phase out the benefit of the 10 percent bracket and cap itemized deductions. All these changes would boost effective tax rates.
The 10 percent surtax on high-income individuals is in addition to the 3.8 percent levy on unearned income that was adopted as part of the 2010 Affordable Care Act (which Camp retains). In addition, the surtax would apply to income that is currently untaxed, such as the value of employer sponsored health insurance and the health deduction for the self-employed, municipal bond interest, untaxed Social Security benefits, and 401(k) contributions.
He’d also backload tax benefits for retirement savings. He’d bar new contributions to traditional and non-deductible IRAs but at the same time make everyone eligible to contribute to Roth IRAs. This would generate revenue in the early years since contributions would not be deductible. But because distributions from Roths are tax-free, such a design would increase future deficits by billions of dollars.
In all, Camp deserves a ton of credit. He’s spent years working on a reform plan. He toured the country promoting the idea and spent countless hours teaching fellow House Republicans what rewriting the code really means. Camp soldiered on despite a serious illness and severe constraints imposed by his own party leadership. In the end, House GOP bosses won’t even try to pass his bill.
And he did it all even though party rules will force him from the Ways & Means chairmanship at the end of this year. Yet, he persevered.
In the end, the details of Camp’s plan are less important than the fact that he wrote a plan. His framework, like the ones proposed by President George W. Bush’s orphaned tax reform commission, the Bowles-Simpson fiscal commission, the Bipartisan Policy Center, and others will help inform future efforts to rewrite the code. Think of Camp’s plan as one big step down a very long road.
Back in November, I suggested that tax prep firms might be a useful portal for low-income people to get insurance coverage through the Affordable Care Act. The idea: Since many key ACA-related issues are income-based, commercial tax prep is an easy way for folks to learn whether they are eligible for expanded Medicaid coverage, how much of a premium subsidy they can get, and how much of a penalty they’d owe for not getting coverage.
Now, a new report by my Urban Institute colleagues Stan Dorn, Matthew Buettgens, and Jay Dev shows just how many of the uninsured could benefit from linking tax prep to the ACA. They figure that at least 18.9 million federal tax filers have no insurance and are eligible for either Medicaid or ACA premium subsidies. That’s almost three out of every four of the uninsured who could benefit from the ACA.
At the same time, nearly 60 percent of those making $50,000 or less reported getting some third-party help with their tax returns in 2008. Nearly 65 percent of filers claiming the Earned Income Tax Credit use paid preparers (if you saw the EITC instructions, you’d know why).
The Urban study actually underestimates the number of filers since it counts only those legally required to fill out 1040s or those eligible for the EITC. However, many other workers also file—mostly to get refunds because they have had too much tax withheld from their paychecks.
There are other benefits to tying ACA insurance to tax prep. The vast majority of low-income people receive refunds and many get refundable credits. That cash in their pocket may make them more likely to buy coverage.
And, of course, tax preparers are professional form-fillers. They already collect most of the information consumers need to apply for coverage, making it even easier for their customers. Their role will be even more important starting in 2015 when federal funding for application assistance comes to an end.
Some tax prep firms have already figured out the potential of this market. The store-front firm Jackson Hewitt is probably the most enthusiastic about the model. Its staffers will complete and even mail the Medicaid paperwork for clients who are eligible for expanded coverage. They are not licensed brokers so can’t sell insurance directly, but the firm has created a partnership with the commercial online insurance marketplace Getinsured which will help Jackson Hewitt customers buy coverage.
For no extra fee, Jackson Hewitt will figure your subsidy (and your penalty) when it prepares your taxes. And, if you want, it will send that information directly to Getinsured, where you can buy a policy.
Jackson Hewitt isn’t alone: H&R Block is partnering with the commercial online health exchange GoHealth to help people enroll through Block-branded online chat and phone support. In a pilot program, Block also will have insurance agents located in some Arizona tax offices. Intuit has created a product called TurboTax Health and has a partnership with the commercial online marketplace eHealth Inc.
The data Stan and his colleagues have published suggest it might make sense to revise the 2015 ACA open enrollment season so it overlaps with the April 15 tax filing deadline. Currently, ACA enrollment is scheduled to run from Nov. 15, 2014 to Jan. 15, 2015. A brief extension could even help this year since 20 percent of EITC returns are filed after March 31, the end of the 2014 open season. Among all returns, about 40 percent are filed after March 31.
As any good behaviorist will tell you, salience matters. And when you see how much of a subsidy you can get if you buy insurance, and how much of a penalty you’ll owe if you don’t, it tends to focus the mind. And, in this case, it has the potential to grab the attention of millions of people.
An advisory commission has recommended some interesting changes to the District of Columbia’s tax system. The commission’s proposals may provide some useful lessons for other states looking to reform their tax codes.
In some ways, of course, DC is unique. While it is a city, it functions much like a state. However, because of its odd status, DC’s ability to tax is constrained by Congress. Economically, DC is booming and the city escaped relatively unscathed from the Great Recession. Its enormous federal presence provides a powerful employment base, but it also means a huge chunk of the city’s economy is excluded from taxation.
For all of that, the commission had to address many of the same problems faced by other state tax reform initiatives: How to make its individual tax code simpler and more progressive, how to design a stable business tax, and how to broaden its sales tax base.
The DC tax reform proposal was developed with the help of several of my Tax Policy Center colleagues. Kim Rueben served on the commission, Steve Rosenthal was its staff director, and Norton Francis provided technical support.
On the individual tax side, the panel suggested several steps to lower income taxes for middle-income households. The city currently has four brackets, but its second highest, 8.5 percent, is extremely wide and applies to taxable income from $40,000 to $350,000. The top rate, currently 8.95 percent but scheduled to drop to 8.5 percent in 2016, applies to taxable income in excess of $350,000.
The proposal would create a new 6.5 percent bracket for income between $40,000 and $80,000. It would also set a top rate of 8.75 percent, slightly lower than the current rate but higher than the scheduled 8.5 rate.
The panel also suggested several changes to conform the DC code to federal law, including raising both the standard deduction and personal exemption to federal levels, creating separate rate structures for singles and individuals, and boosting the estate tax threshold to $5.25 million. Unfortunately, the panel also adopted the federal gimmick of phasing out the personal exemption for some high-income taxpayers (which is a hidden tax rate surcharge).
For businesses, the panel proposed lowering the city’s franchise tax to 8.25 percent from 9.975 percent, making the levy more competitive with the surrounding suburbs. At the same time, it would create a $100 per employee local services fee. The government would not pay it, but non-profits would. This levy may be a clever way to circumvent the congressional prohibition against a commuter tax.
Finally, the panel suggested raising the city’s sales tax rate to 6 percent from 5.75 percent and somewhat broadening the base to include services such as home improvement contractors, barber shops, and health clubs. However, it did not suggest expanding sales taxes to include other services such as accounting and legal. It also left at current double-digit rates special taxes on hotels, restaurant meals, car rentals and other services that shift the tax burden to visitors.
The package would cut individual income taxes by about $450 million over the next four years, raise sales taxes by about $240million, and boost business taxes by about $20 million. The panel did not address property taxes at all. Including some other smaller changes, the overall proposal would cut taxes by about $240 million over four years.
For 2015, that’s a tax cut of a bit more than 1 percent and certainly manageable. It may be more problematic, however, should the federal presence shrink in coming years.
The package is itself a political compromise, and it will certainly face more revisions when it goes to the DC city council. However, it looks like a sensible set of reforms that anticipates a changing city with a more diverse economy.
Every two years, I sit in front of my TV watching the Olympics. Like clockwork, in the midst of some competition I can’t understand, my mind wanders to tax wonkdom and I ask myself: Why is the U.S. Olympic Committee a tax exempt organization?
The law says tax exempt status is granted to groups that “foster national or international amateur sports competition.” But do the hyper-marketed modern games even remotely fit the ideal of amateur sports? Sure, some athletes who represent the U.S. are amateurs but a great many others are highly paid professionals or marketing magnets. Snowboarder Shaun White–who won no medals– makes a reported $8 million-a-year in endorsements.
And then there is USOC itself. By almost any standard, it is a commercial enterprise. It exists primarily to help organize a bi-annual made-for-TV entertainment extravaganza. Yes, it provides some support for athletes (though surprisingly little). But its real business is marketing itself and playing its part in a two-week orgy of athletic commercialization.
USOC’s total revenue for 2012 (the last publicly available data) was $353 million. Of that, $263 million, or nearly 75 percent, was generated by broadcast rights, trademark income, and licensing agreements, according to its financial statement. About $46 million came from (mostly corporate) contributions.
How did the committee spend that money in 2012? Its total expenses were $249 million. Nearly $21 million went to fundraising, $17 million to sales and marketing, $3 million to public relations, and $14 million to administrative and general expenses.
Of what was left, about $74 million went to “member support,” or to fund individual National Governing Bodies such as the US Ski & Snowboard Association, USA Track & Field, US Speedskating and the like.
How much went to direct support for athletes? It’s hard to tell but according to one estimate, it was less than 6 percent of total USOC spending. Top ranked athletes get monthly stipends ranging from $400 to $2,000. Others get nothing. Athletes have access to Olympic training centers though most have to pay to use and stay at them and therefor don’t. A watchdog group called the U.S. Athletic Trust has a nice explanation here, though it reported on USOC expenses from 2009-2011.
About $24 million went to support U.S. Paralympics, and $4 million to sports science and sports medicine.
And USOC paid its senior staff handsomely. A dozen of its top executives made $250,000 or more in 2012, and its CEO, Scott Blackmun, received $965,000. After all that, it still had nearly $100 million in surplus revenue.
To be fair, USOC isn’t the only sports behemoth to enjoy tax-exempt status. The National Football League, the National Hockey League, the Professional Golfers Association, and other big-bucks professional sports leagues are also tax-exempt–though under a different code subsection than USOC. Last year, Sen. Tom Coburn (R-OK) introduced a bill to take away the tax-exemption for the pro outfits. It has gone nowhere.
USOC is somehow different, perhaps because it so successfully clings to the myth of the amateur athlete who competes for the love of sport, and not the big bucks.
But reading through its financials, USOC sure looks like a business. Yes, it probably does foster enough international amateur competition to satisfy the law, but I’m still left with the question I had as I tried to figure out what the heck slopestyle is: Why does the government grant tax-exempt status to businesses like USOC?
Homepage photo from Flickr user Joint Base Lewis McChord (CC BY-NC-SA 2.0).
Senator Ron Wyden (D-OR), about to become the new chairman of the Senate Finance Committee, said Friday that he aims to eventually rewrite what he described as a “dysfunctional, rotting mess of a carcass that we call the tax code.” But in an acknowledgement of the challenges of tax reform, Wyden said he wants to quickly extend dozens of expiring tax provisions for another year as a “bridge” to reform and he even embraced some new tax subsidies.
Wyden will replace Sen. Max Baucus (D-MT), who the Senate confirmed Thursday as the new U.S. Ambassador to China. Speaking in Los Angeles to a conference sponsored jointly by the USC Gould School of Law and the Tax Policy Center, Wyden framed his tax agenda around several key issues:
- Narrow the gap between taxation of investment income and ordinary income.
- Significantly increase the standard deduction.
- Simplify and enhance the refundable Child Tax Credit and Earned Income Tax Credit.
- Revise savings incentives by creating a new investment account for all Americans at birth, shift savings subsidies from high-income taxpayers to low- and moderate-income households, and consolidate and simplify the current tangle of existing tax-preferred savings incentives.
- Enhance job training.
- Restore Build America Bonds—a short-lived idea that partially replaced tax-exempt state and local bonds with direct federal subsidies. He’d also seek ways to encourage business to funnel overseas earnings into domestic infrastructure investment.
Wyden’s ambitious agenda incorporates most elements of his own 2010 tax reform plan though it goes beyond that proposal. And it includes some internal contradictions that he’ll eventually have to resolve.
On one hand, he says he wants to eliminate or scale back many of the tax expenditures that have made the Tax Code the dysfunctional rotting carcass he so memorably described. On the other, he’d add new subsides. For instance, his talk on Friday included a shout-out to Senator Bob Menendez (D-NJ) who introduced a bill called Better Education and Skills Training (BEST) for America’s Workforce Act that would create $1 billion in new tax credits for firms that help train the long-term unemployed.
On principle, there is nothing wrong with replacing inefficient subsidies with better ones. But Wyden will find it extremely difficult to add some of his personal favorites while he’s slashing those of his colleagues.
Back in 2010, Wyden sponsored his own reform bill with now-retired GOP senator Judd Gregg (R-NH). He’s since gotten a new Republican cosponsor, Dan Coats of Indiana. The bill, called the Bipartisan Tax Fairness and Simplification Act, remains Wyden’s model for reform, though he made it clear that he’s willing to revise the proposal significantly to attract broader support. For a TPC analysis of Wyden original bill, click here.
That bill would create three individual income tax rates—15, 25, and 35 percent, significantly increase the standard deduction, repeal the Alternative Minimum Tax, and turn the preferential capital gains rate into an exclusion.
It would retain most big tax preferences such as those for home mortgage interest, state and local taxes, and employer-sponsored health insurance. But it would get rid of some smaller ones and turn the exclusion for municipal bond income into a refundable credit. It would set a single corporate rate of 24 percent and end some business preferences.
The TPC/USC conference was on income inequality and Wyden framed his tax agenda as part of a broader effort to address that issue. He said he sees proposed tax changes such as boosting capital gains taxes and expanding the EITC as part of an agenda that also includes raising the minimum wage.
That makes Wyden sound like a standard progressive Democrat. But his record is much more complex. For instance, Wyden has bucked his own party’s leadership by reaching across the aisle to lawmakers such as House Budget Committee Chairman Paul Ryan (R-WI) on Medicare reform.
Wyden likes big ideas, but he is also a pragmatist. His challenge as the new chair of the Finance Committee will be to mix the ambitious with the realistic. That’s what Bob Packwood, the last Finance Committee chair from Oregon, did when he helped pass the Tax Reform Act of 1986.
Over the next decade, the individual income tax will be the fastest growing source of federal revenue, according to new estimates by the Congressional Budget Office. In fact, the individual income tax will pretty much be the only revenue source likely to increase significantly over the next decade. As a result, it will generate more than half of all federal revenue for the first time since the turn of the 21st century.
Overall, CBO figures total federal revenues will grow from their recent recession-battered low of 14.6 percent of Gross Domestic Product in 2009 and 2010 to about 18.4 percent in 2024. CBO projects revenues this year will rebound to 17.5 percent of GDP. Over the decade, revenues will average about 18.1 of GDP, which is pretty close to the historic post-WW II average.
But the really interesting story is in the composition of revenues. Nearly all the projected increase in taxes will come from the individual income tax: CBO projects the levy will rise from 8.0 percent of GDP this year to 9.4 percent by 2024.
As a result, CBO figures that a decade from now, the individual income tax will account for nearly 52 percent of all federal revenue. The last (and only) time the individual tax generated half of all federal revenues was in 2001, just before the dot.com bubble burst and Congress passed the first of the huge George W. Bush-era tax cuts.
Moreover, the federal government has rarely collected as much as 9.4 percent of the total economy in individual income tax. According to the Office of Management & Budget, this happened only in 1944, 1981 (just before President Reagan’s tax cuts), and during the stock market boom in 1998-2001.
While individual taxes are expected to increase, other major sources of revenue will barely change as a share of the economy. For instance, the payroll taxes that fund Social Security and Medicare will remain flat through the next decade, CBO figures. They represented 5.7 percent of GDP last year, 6.0 percent this year, and are projected to fall to 5.8 percent in 2016 and stay at that level.
The corporate income tax will rise as a share of GDP for the next few years and then drift down. On average it will hover at about 2.0 of GDP for the next decade. And it will average only about 11 percent of all federal revenue through the period. That’s a significant increase from the depths of the recession when corporate taxes collapsed to barely 6 percent of total revenues. But it is a far smaller share than in the 1960s, when it averaged one-fifth.
What will drive these changes? It is the proverbial long story. But CBO identifies a few culprits.
CBO explains much of the rise in individual income taxes by expected increases in real incomes produced by a recovering economy, including higher wages, salaries, capital gains, and income to owners of pass-through firms, who report their taxes on their individual returns. CBO also expects a significant increase in distributions from retirement accounts for at least the next few years, driven in part by higher asset values.
Two other reasons: Higher tax rates for upper-income households (including the surtax in the Affordable Care Act) and the phenomenon known as real bracket creep. Tax brackets are adjusted for inflation but not economic growth. For at least the next few years, CBO figures incomes will grow faster than those inflation-adjusted brackets.
On the corporate side, CBO projects a bump in tax revenues through 2017, but a fall-off after that. A key reason is that CBO assumes that dozens of business tax breaks (the so-called extenders) will disappear (they technically expired at the end of 2013). If they are extended, as is likely, corporate tax revenues are likely to fall below CBO’s forecast.
I suspect these projections will be something of a Rorschach test for lawmakers. Anti-tax conservatives will see them as a reason to cut individual taxes. Progressives will use them to oppose cuts in corporate tax rates and justify increases in the Social Security payroll tax cap. But whatever you want to read into them, these projections are pretty interesting.
I was chatting the other day with a fellow budget wonk who noted the cruel paradox of fiscal politics: When the economy is bad, deficits rise and the public support for reducing them grows. Yet a poor economy is the worst possible time to raise taxes and cut spending. By contrast, a period of strong growth is the best time to tackle the deficit. But when the economy is healthy, deficits normally fall and so does the political motivation for pols to do anything about them.
And as the Congressional Budget Office’s fiscal outlook released today shows, deficits are dropping like the proverbial stone. As the economy improves and the growth in health costs slows, the deficit is likely to continue to decline, at least for the next few years. CBO figures deficits will fall to just 2.9 percent of GDP in 2016, their lowest level since 2007. That’s far below their 9.8 percent peak in the depths of the Great Recession in 2009.
Despite this good news, we are hardly out of the fiscal woods. The national debt will continue to rise, and CBO warns that annual deficits will return to troublesome levels of around 4 percent of GDP by the early 2020s. But those predictions are unlikely to drive policy since they are both uncertain and far beyond the short-term vision of either the public or most pols.
You can see the turn in public opinion in a new poll by the Pew Research Center. The share of those who see deficit reduction as a top priority fell from 72 percent in January, 2013 to 63 percent in last month. Eight in ten of those surveyed think strengthening the economy should be the nation’s top priority now.
Sagging interest in the deficit is no surprise. But it makes it very hard for lawmakers to make tough choices at the time the economy gives them the flexibility to do so.
You can see this in the evolving fiscal policy debate. My friend and I talked a couple of days after President Obama delivered his State of the Union Address. This was a speech where the president—who once spoke boldly about the need for a grand fiscal bargain—effectively ignored long-run budget issues.
And it isn’t just Obama. Congressional Republicans seem to have lost their stomach for fiscal combat as well. Stories circulating this morning suggest the House GOP wants to use the coming need to increase the nation’s debt limit to demand approval of an oil pipeline or repeal provisions of the Affordable Care Act that limit risk for health insurance companies. Whatever you think of these issues, insurance company risk corridors are a long way from a grand bargain.
Some of this has to do with Washington’s seemingly endless fiscal deadlock. Republicans simply will not consider any deficit reduction plan that includes new revenues. And Democrats won’t discuss changes in Medicare, Medicaid, and Social Security spending until taxes are on the table.
Thus it isn’t surprising that battle-weary pols have agreed to disagree—at least until the next election. Republicans may also be feeling less heat on fiscal issues as the clout of the anti-government tea party seems to be waning—another phenomenon driven in part by an improving economy.
But that begs the question: How do lawmakers tackle deficits when they should—at a time when the economy is strong and the flow of red ink slows to a relative trickle?
The answer may have emerged in the heated budget debates of 2011-2012 when some policymakers proposed combining a short-term fiscal stimulus with long-term deficit reduction. The idea died, another victim of the deep mistrust that has infected policy debates in the Capital. But it may ultimately be the solution to this troubling political paradox.
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.
Does it make sense to fund much-needed roads, bridges, and mass transit with a big tax cut for multi-national corporations? A growing number of Democrats and Republicans seem to think so. But I have my doubts.
At first glance, what could be more appealing? At a time when the Highway Trust Fund is grossly underfunded–thanks to the refusal of Congress to raise the gas tax–Democrats would get more money to build infrastructure and Republicans could take credit for cutting corporate taxes. Billions in new construction. For free. It sounds almost too good to be true.
Of course, it isn’t free. But it is complicated. And there is the near-theological argument about whether the revenue piece is a tax cut at all.
The model is hardly new. The latest version has been sponsored by Representative John Delaney (D-MD) and dozens of House Democrats and Republicans as well as a growing number of senators. Here’s the plan:
First, create a $50 billion American Investment Fund that would provide loans or guarantees to help state and local governments finance infrastructure. States would repay the loans at market interest rates.
The scheme would be funded with 50-year bonds that pay just 1 percent interest. U.S.-based multinational corporations would buy the paper through an auction. Because the bonds would pay a below-market interest rate, the firms would demand significant concessions from Washington to buy them.
The price would be a tax break on their foreign income. Currently, U.S. law allows firms to defer corporate tax on most foreign-source income until those profits are repatriated to the U.S. It then taxes the profit at 35 percent with a credit for foreign income taxes paid. In recent years, U.S. firms have accumulated $2 trillion in assets in their foreign affiliates, much of it in low-tax jurisdictions. They’d benefit enormously if Congress allowed them to bring those profits home and pay low- or no-tax.
Under Delaney’s plan, firms would bid for the right to buy the bonds. For each dollar of bonds a multinational buys, it would be allowed to repatriate tax-free a portion of the amount it pays for the debt.
The firm willing to accept the lowest foreign earnings exclusion per dollar of bonds would bring home that amount of money tax-free (plus it would get the bonds). While the market would set the amount, Delany assumes firms would bring back something like $4 tax-free for every $1 they invest in the infrastructure paper.
There is some urgency to this because the Highway Trust Fund—the federal government’s mechanism for funding roads, bridges, and transit—is busted. The last time Congress increased the motor fuels tax that is supposed to finance the fund was 1993, and inflation and increased fuel efficiency have severely eroded its value. As a result, Congress has looted more than $40 billion in general revenues to pay for construction and made the Trust Fund something of a running joke.
Delaney’s plan would help fill the gap—for now. But the idea seems to be a bit of a shell game. Instead of spending money directly on infrastructure bonds, the bill would give multinationals a tax break to buy the paper at an inflated price. That loss would increase the federal deficit as surely as if it were direct spending through an underfunded Trust Fund. The highway program would effectively become a new tax expenditure—probably the last thing we need.
Some argue that multinationals would never bring the money home at current rates, so whatever tax they pay is gravy. Others, including congressional scorekeepers, disagree. They say repatriating money tax-free is a tax cut. They note, as well, that past tax holidays and promises of new ones may themselves discourage firms from bringing that money back. After all, why pay now if you can just wait ‘til the next holiday.
It is also important to think about this plan in the context of broader corporate tax reform. If Congress repeals the repatriation tax but imposes a new transition tax on past accrued profits, as some lawmakers would, there may no longer be any undistributed earnings to fund this plan. That’s one reason why supporters may want to pass it before corporate reform becomes law.
The plan is quite clever. But in the end I’m not sure it does more than move around a lot of money. It would be simpler if lawmakers bit the bullet and raised the gas tax or, even better, taxed mileage to make the levy a true user fee.