Lately there has been a lot of bold talk about getting rid of tax breaks to pay for lower rates and deficit reduction. It was not too long ago that base-broadening reform was considered one of the most difficult tasks Congress could undertake. But now it seems as though the political calculus has been turned on its head.
Battle-hardened by the even tougher struggle for deficit reduction, our leaders look at tax reform as something that will make their lives easier, not harder. Democrats will never accept a long-term deal without tax increases. House Republicans won't accept increases without a major commitment to reform. So tax reform has become the essential political ingredient for achieving the essential economic goal of long-term deficit reduction.
With all the enthusiasm outside the tax world, can we expect the next Congress to clear out the forest of tax breaks in the code?
There is some hope. Getting a lot of attention now are various schemes to cut or cap all tax benefits at once. Just last week GOP presidential nominee Mitt Romney floated the idea of an across-the-board cap on deductions of $17,000 per taxpayer. For months Martin Feldstein, one of Romney's advisers, has been promoting a limit on tax benefits equal to 2 or 3 percent of adjusted gross income. President Obama wants to limit the value of deductions for high-income taxpayers to what it would be for a taxpayer in the 28 percent bracket. (For related coverage, see p. 135.)
But the serious money needed to make appreciable changes in tax rates and the federal deficit will come about only if Congress takes a chain saw to the big five individual tax breaks: the exclusion for employer-provided health insurance, the mortgage interest deduction, the charitable deduction, the deduction for state and local taxes, and the 15 percent rate on capital gains and dividends. As even the most idealistic tax reformers understand, each of those has powerful, dug-in constituencies that will fight tooth and nail.
Moreover, it is in the congressional DNA to manipulate the tax code to subsidize favored causes.
So far in the 112th Congress, House lawmakers have introduced more than 700 tax-related bills, only three of which have become law. Among the introduced bills were several targeted tax increases on politically vulnerable constituencies, including big oil (H.R. 601), hedge fund managers (H.R. 4016), and owners of corporate jets (H.R. 4199) and yachts (H.R. 1702). But the main purpose of nearly all the introduced bills was tax relief.
In its long wish list, Congress included tax breaks for the old economy (steel, H.R. 2223) and the new (nanotechnology, H.R. 2749). There are tax breaks for land freely donated (H.R. 1149) and for land expropriated through eminent domain (H.R. 2327).
To get energy from the seas, there are tax breaks for algae-based biofuel (H.R. 1149) and offshore wind power (H.R. 3238). For buildings, there are tax breaks for roofing (H.R. 2962), for fire sprinklers (H.R. 1792), and for insulation wrapped around heaters and air conditioners (H.R. 2866).
To address health issues, there are tax breaks for hearing aids (H.R. 1479), dental care (H.R. 1788), and fresh fruits and vegetables (H.R. 317).
To support the arts and entertainment, there are tax breaks for songwriters (H.R. 3343), artists (H.R. 1190), and filmmakers (H.R. 5793). To put more excitement into life, there are tax breaks for motor speedways (H.R. 673), beer brewers (H.R. 1236 and H.R. 1675), whiskey distillers (H.R. 777 and H.R. 1986), slot machines (H.R. 427), indoor tanning salons (H.R. 2092), and traveling companions on business trips (H.R. 467).
To promote preservation of our past, there are tax breaks for historic homes (H.R. 2555), historic schools (H.R. 6151), and donations of historic items (H.R. 5982).
To cut down on traffic, there are tax breaks for commuters using public transportation and bicycles (H.R. 6066) and for employees who work at home (H.R. 710). There are tax breaks for parents who school their children at home (H.R. 5963). And to make domestic chores easier, there are tax breaks for supermarkets (H.R. 1542) and household appliances (H.R. 6056).
For hunters, there are tax deductions for "apparently wholesome" food given to Indian tribes (H.R. 518) and donations of wild game meat (H.R. 3142). And there are tax breaks for the proceeds from sales of farm animals raised as part of a 4-H program (H.R. 1271).
SIDEBAR: Romney Deduction Cap Would Vary Across States
- On October 1 GOP presidential nominee Mitt Romney proposed capping itemized deductions at $17,000 per taxpayer. For the 47.1 million Americans who itemized in 2010, the average deduction amount was $26,550. But as shown in the table, the cap would have a larger effect in high-income, high-cost states like California and New York than in the rest of the country.
Average Itemized Deductions in 2010, by State
(dollars in thousands)
Rank Jurisdiction Deductions Rank Jurisdiction Deductions
1 California $34.15 41 Maine $22.06
2 New York $33.17 42 North Dakota $21.98
3 Connecticut $32.53 42 New Mexico $21.98
4 District of Columbia $31.94 44 Michigan $21.75
5 New Jersey $30.68 45 Alabama $21.47
6 Maryland $30.19 46 Kentucky $21.26
7 Hawaii $28.58 47 Alaska $20.99
8 Massachusetts $28.09 48 Ohio $20.96
9 Nevada $27.54 49 Iowa $20.90
10 Virginia $27.46 50 Indiana $20.61
Source: IRS Statistics of Income division.
To make lifesaving medical procedures possible, there are tax breaks for organ donations (H.R. 2755). And for future miracles, there are tax breaks for umbilical cord blood banking (H.R. 1614) so that a newborn's stem cells can be saved for yet-to-be-developed therapies.
There are even tax breaks to help end discrimination based on sex, race, or color (H.R. 4376) and for grass-roots democracy (H.R. 6426).
An Olympic gold medal (made mostly of silver) from the London Games has a material value of about $700. Four separate bills were introduced late this summer to prevent winning an Olympic event from becoming a taxable event.
Finally, for morticians and cemeteries there is a tax break for the costs incurred for the grim task of burying the indigent poor (H.R. 1033).
If you find all that too taxing, you might appreciate legislation that would postpone the tax return filing deadline from April 15 to the first Monday in November (H.R. 88) or, even better, legislation that simply terminates the entire tax code by the end of 2015 with no guarantee of any new tax system to replace it (H.R. 462).
Now, some of those tax breaks may seem frivolous, and some may seem worthwhile. But whether funny or serious, the introduced bills illustrate how, even when Congress seems devoted to reform, it will be difficult to suppress its urges to meddle with the code.
About Tax Analysts
Tax Analysts is an influential provider of tax news and analysis for the global community. Over 150,000 tax professionals in law and accounting firms, corporations, and government agencies rely on Tax Analysts' federal, state, and international content daily. Key products include Tax Notes, Tax Notes Today, State Tax Notes, State Tax Today, Tax Notes International, and Worldwide Tax Daily. Founded in 1970 as a nonprofit organization, Tax Analysts has the industry's largest tax-dedicated correspondent staff, with more than 250 domestic and international correspondents. For more information, visit our home page.
For reprint permission or other information, contact email@example.com