Jul 30, 2010
Sacrificing “Sacred Cows”
Consider this…
There are various third rails in politics – things politicians don’t generally touch for fear of the backlash. Programs like Medicare and Social Security, farm subsidies, and veteran’s benefits.
And there are some third rails in the tax world as well. For years, Congress has implemented and extended popular tax deductions and credits for both individuals and institutions that have achieved a “sacred cow” status. The home mortgage interest deduction and the R&D tax credit are just two such examples. Members of Congress from both sides of the aisle champion these expenditures and they are politically popular with those they benefit. However, the Congressional Joint Committee on Taxation (JCT) calls these tax breaks “tax expenditures” as the government loses out on revenue that would otherwise be collected, absent these tax measures.
Set this against our country’s current fiscal situation. Rising national debt and new public policy priorities already have President Obama and Congress promising to freeze and cut federal spending. Indeed there have been many long nights of desperate searching on Capitol Hill for money to pay for legislation. Suddenly, those sacred cows in tax world aren’t so sacred anymore.
Lately, plenty of folks on and off of Capitol Hill have suggested cutting or eliminating some or all of these tax expenditures to control our sky-rocketing national debt. And given the size of these tax expenditures – Joint Tax estimates that they will “cost” the government $1 trillion this year – they certainly pose a tempting target. Economist Len Burman suggested earlier this year that simply capping tax expenditures at their 2012 levels for 3 years, and indexing them for inflation after that, would reduce the federal deficit by $3.5 trillion. Even more recently, economist Martin Feldstein noted in a Wall Street Journal opinion piece that, “cutting tax expenditures is really the best way to reduce government spending.”
On the Hill, the President’s deficit commission has let it be known that restrictions on federal tax expenditures are definitely on their radar screen. The most senior Republican on the Ways and Means Committee, Dave Camp (R-MI), told the press, “clearly (tax expenditures) is something we should look at” and fellow Ways and Means Committee Member, Xavier Becerra (D-CA), said, “there may be things we have to do with any number of these tax expenditures.” Though both recognized the value of certain tax breaks for the public, it seems very likely that the deficit commission will recommend at least some sort of restriction on tax expenditures.
Nonprofits are not immune from this debate – the charitable deduction is considered a tax expenditure, and it’s one that President Obama has targeted in his FY 2010 and FY 2011 budget proposals. If such popular tax breaks like the charitable deduction and the home mortgage interest deduction are being brought up as potential revenue raisers, it stands to reason that there are few “sacred cows” left in D.C. anymore. Look for calls for “tax expenditure reform” more often, as the search for ways to combat America’s record deficit and debt levels continues.