Taxes, or Spending? Budget Fight in Congress Focuses on a Distinction

The Bozeman project relied on tax credits, while New Orleans is using federal grant money. To economists — and to taxpayers — that makes no real difference. “These are at some point arbitrary distinctions between taxes and spending,” said Donald Marron, the director of the Tax Policy Center, a nonpartisan Washington research group.

But to Congress, it makes all the difference — and is something worth fighting over. As lawmakers struggle to narrow the government’s deficit, every dollar taken away from the block grant program used in New Orleans counts as a budget cut. Every dollar taken away from the Bozeman tax credit program — part of a vast array of so-called tax expenditures that cost the federal government more than $1 trillion in lost revenue every year — counts instead as a tax increase.

In budget proposals put forward last week, both Democrats and Republicans called for scrubbing billions of dollars’ worth of the popular deductions, loopholes, preferential rates and credits that litter the tax code, mostly benefit higher-income taxpayers and often reflect undue government interference in economic decisions. But the two sides are sharply divided what should happen to any revenue raised.

Senator Patty Murray of Washington State, the shepherd of the Senate Democratic budget proposal, proposed raising nearly $1 trillion in new revenue over the next 10 years by cutting tax expenditures and using the money to reduce the deficit. The White House has said it supports her plan.

“We don’t often think of tax expenditures as a form of spending,” Senator Murray said at a hearing this month. But, she said, “they require us to make the same kinds of trade-offs that other forms of government spending would, and lots of them.”

In contrast, Representative Paul D. Ryan of Wisconsin, in the House Republican budget, insisted that any money generated from curbing tax expenditures must be offset with lower tax rates, so that overall revenue remained the same. Republicans on the Senate Budget Committee echoed that argument. “Eliminating tax exemptions is a tax increase,” said Senator Jeff Sessions of Alabama. “You can’t spin it any other way.”

At the root of the bitter semantic back-and-forth is a simple truth: every tax expenditure — and there are scores of them, used to encourage employers to provide their workers with health care, to make houses more energy-efficient, to aid timber cutters and much more — benefits a certain group of taxpayers or a specific industry. And nobody wants to give up anything.

For instance, as part of the January deal to avoid the so-called fiscal cliff, stock car racetrack owners managed to secure an extension of a tax break that lets them write off investments in their properties more quickly. That break — as lobbied for by Nascar fans — will cost the government about $80 million over the next 10 years.

In the corporate code, expenditures are “just a hidden, ersatz, Soviet-style five-year plan,” said Edward Kleinbard, a longtime Congressional tax expert now at the University of Southern California. “We would never contemplate a world in which the government said, ‘We’re going to write out checks to Nascar because it’s an important resource and we’re going to pay for it!’ People would say, ‘They’re out of their mind!’ ”

Tax expenditures also make it harder to gauge the impact of the federal budget on such crucial activities as housing and retirement security. For instance, the home mortgage interest deduction costs the Treasury about $100 billion a year in lost revenue, and effectively encourages the mostly affluent families who itemize deductions to buy a more expensive home. In contrast, the annual budget of the Housing and Urban Development Department, which generally goes to aiding the poor, is less than $50 billion.

“If someone said, ‘Let’s have a voucher program on the spending side, giving high-income families vouchers to subsidize their mortgages,’ ” said Glenn Hubbard, the dean of Columbia Business School and a prominent Republican economist, referring to the home mortgage interest deduction, “I don’t think that would get through Congress.”

Article source: http://www.nytimes.com/2013/03/18/business/economy/taxes-or-spending-budget-fight-in-congress-focuses-on-a-distinction.html?partner=rss&emc=rss