A Plethora of Tax Breaks Eases the Sting, but at What Price?

WASHINGTON —  As tax laggards across the land search for that last money-saving deduction, that elusive refund-producing credit in the waning hours before tonight’s filing deadline, they’re in good company.

America has become a nation of loophole chasers.

Although it tends to receive less attention than government spending, the proliferation of tax breaks represents a substantial share of the fiscal benefits bestowed by Washington. And many politicians, including President Bush and Democratic challenger John F. Kerry, want to provide even more.

For every dollar the federal government receives from corporate and individual income tax collections, it gives away at least 75 cents in the form of deductions, exemptions, exclusions, credits, preferences and deferrals, tax experts say. Politicians have increasingly turned to tax breaks to accomplish goals they once tackled through government spending, partly because they have found it all but impossible to raise taxes in order to fund new programs.

It is, in the view of some analysts, a case of good intentions run amok.

“We’re putting everything in the tax code, from welfare to education to housing to corporate research to retirement savings,” said Eugene Steuerle, a former Treasury official who helped close loopholes in the 1980s. The tax code, he said, increasingly has become an instrument of social and economic policy, a vehicle for what some critics characterize as spending programs in disguise.

“On the corporate side, the system is more loophole than tax these days,” said Robert McIntyre, director of Citizens for Tax Justice, a liberal advocacy group. “On the personal side, we’ve asked the Internal Revenue Service to run very large segments of the government.”

It’s not just fat cats and big corporations that are feeding at the trough. In fact, middle-income Americans are among the biggest beneficiaries of federal “tax expenditures.”

The government currently provides 137 income tax breaks to individuals and businesses adding up to $741 billion a year, according to the latest tally by the White House Office of Management and Budget. That compares with estimated income tax collections of $934 billion this year.

The roster of tax expenditures includes such whoppers as the deduction for employer health insurance contributions, which will reduce federal tax collections an estimated $107 billion this year, and the deduction for home mortgage interest, a $63-billion revenue drain. But it also includes a bevy of micro-breaks such as a $60-million credit for clean-fuel vehicles and a $50-million credit for handicapped-access improvements.

Chris Edwards, director of fiscal policy studies at the conservative Cato Institute, said he was finishing his taxes over the weekend and noticed a new deduction on his 1040 form for teachers who buy books and supplies for their classrooms.

“There it was, a whole new line on the tax form,” Edwards said. “And there’s student loan interest, there’s tuition and fees, there’s IRA deductions and moving expenses. Despite all the political talk about simplification, it continues to get worse.”

What all tax expenditures have in common, and what distinguishes them from across-the-board rate cuts, is that they were added to the tax code to encourage some activities and discourage others, and to reward certain constituencies, such as homeowners or retirees.

Of course, one taxpayer’s incentive is another’s subsidy. When the government provides a special break to one group of taxpayers, in theory it has to collect that much more from everybody else.

The proliferation of tax breaks has allowed lawmakers to enact the equivalent of new spending programs without subjecting them to the kind of scrutiny that would accompany traditional outlays.

Where traditional spending programs must usually be renewed each year in the budget process, tax breaks often last indefinitely. And where traditional programs usually have spending limits, tax breaks go to any business or individual that meets the eligibility requirements, regardless of cost to the government.”Sometimes it’s more politically acceptable to portray something as a tax cut or a tax break than as a direct subsidy. But it has the same effect,” said Robert Bixby, executive director of the fiscally conservative Concord Coalition. “It allows government to conduct social or economic policy through the tax code.”

For example, the mortgage deduction and other tax breaks for homeowners will cost the government $105 billion this year, more than double the budget of the Department of Housing and Urban Development.

The Earned Income Tax Credit, which provides $37 billion in annual benefits to 20 million low-wage workers, is now larger than federal spending on any other welfare program.

The tax break for employer-provided health insurance is the government’s biggest health subsidy for the non-elderly.

“It just shows one more way that so much of what happens in government is now hidden,” said former Treasury official Steuerle, now a senior fellow at the Urban Institute. “It turns the power over to the special interests and the people who can hide things in accounting systems rather than making them very explicit and upfront. It’s an issue for both progressives and conservatives. It makes government larger while pretending to be smaller.”

Steuerle helped coordinate a Reagan administration tax reform campaign that led to the elimination of many tax breaks in 1986. But new ones took their place through the 1990s and into the 2000s.

Bush’s 2005 budget calls for several new tax breaks, including a credit to help Americans buy health insurance and new forms of retirement savings accounts. Democratic challenger Kerry has proposed a few new tax expenditures of his own, including credits for health insurance and job creation.

Bill Beach, director of data analysis at the conservative Heritage Foundation, said the increasing number of preferences added to the complexity of the tax code and undermined confidence in the system.

“Whether you’re on the left or the right, you want government to be efficient and to serve the core public purposes that it’s intended for,” Beach said. “The tax code should raise revenues.”