Good News on Deficit Reduction

Conservatives Now Recognize Some Tax Breaks as Wasteful Spending

SOURCE: AP/Yuri Gripas

Grover Norquist, president of Americans for Tax Reform, is pictured above. Last week’s Senate vote, with more than two-thirds of Republicans voting to end a special subsidy for the ethanol industry, was a clear rebuke of Norquist and a welcome embrace of fiscal reality.

By Seth Hanlon, Michael Linden | June 23, 2011

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And now for some good news.

There are suddenly some encouraging signs that conservatives in Congress are finally waking up to the fact that the many tax loopholes, special tax subsidies, and targeted tax breaks buried in our nation’s corporate and individual tax codes are just spending programs by another name. Getting rid of the worst of them would help accomplish two important goals simultaneously: improve the efficiency of the tax code, and raise much-needed revenue to reduce the federal budget deficit and federal debt levels over time.

More good news: The Center for American Progress has already indentified more than $1 trillion worth of these so-called tax expenditures that are ripe for reform or elimination. If the group of bipartisan budget negotiators led by Vice President Joseph Biden were to follow CAP’s recommendations, they would be halfway toward their goal of finding $2 trillion in deficit reduction without having to raise a single tax rate or cut a single dime from Social Security or Medicare.

The first encouraging sign that conservatives are finally prepared to tackle wasteful tax expenditures was a recent vote in the Senate to eliminate the “blender’s” tax credit for ethanol. This tax credit is a perfect example of how federal spending programs masquerade as tax cuts.

Today, the ethanol industry enjoys a special subsidy: They are entitled to a tax credit worth 45 cents for every gallon of ethanol blended into gasoline. Congress could have accomplished the exact same thing by simply writing ethanol producers a check for 45 cents per gallon rather than crediting them the same amount on their taxes, but that would have counted as government “spending.” Since the ethanol program is technically a tax credit, it is instead counted on the federal government’s ledger as a reduction in revenues.

In reality, of course, it’s a spending program transparently “disguised” as a tax cut. That’s why it’s called a “tax expenditure.”

Worse, it’s a very inefficient spending program. Because the federal government’s Renewable Fuels Standard mandate already boosts demand for ethanol, the ethanol tax credit is not needed—and is therefore nothing more than a wasteful giveaway.

You’d think small-government conservatives would have opposed this kind of wasteful spending all along. For years, however, conservatives in Congress defended even the most wasteful tax expenditures out of fear that antitax enforcers such as Grover Norquist’s Americans for Tax Reform would accuse them of wanting to raise taxes. Norquist’s position is destructive and nonsensical: In every meaningful sense, eliminating a tax expenditure like the one for ethanol is a spending cut, not a tax increase.

Now, finally, conservatives are coming around to this realistic, indeed pragmatic point of view. Last week’s Senate vote, with more than two-thirds of Republicans voting to end the ethanol credit, was a clear rebuke of Norquist and a welcome embrace of fiscal reality.

Even better, we now have leading conservative lawmakers explicitly making the distinction between revenue and tax rates. House Majority Leader Eric Cantor (R-VA) recently said, “We are not opposed to revenues. We are just opposed to tax increases.”

That’s good to hear because, if true, it means there are some obvious areas of agreement for deficit reduction. CAP has long been pointing out that tax expenditures are economically and functionally equivalent to spending programs, and that we should reform the ones that don’t work and get rid of the ones we don’t need.

CAP recently released a report entitled “Cut Spending in the Tax Code” where we identified almost two dozen different expenditures worth up to $1 trillion over 10 years that should be the first to go. These are the low-hanging fruit. For example, we identified three groups of tax expenditures as particularly ripe for the picking:

• The more than $40 billion in oil and gas subsidies
• The subsidy for hedge fund and private equity managers
• The deduction for vacation home loans

There is no justification whatsoever for these tax-enabled spending programs. And there are plenty of other such spending programs in our tax code. (see table)

CAP also recently released a long-term plan for America’s fiscal future, which fully balances the budget by 2030 without doing so on the backs of the middle class. A long list of tax expenditure reductions and reforms forms a critical component of that plan. That list begins on page 63 of the report.

With congressional negotiators struggling to find trillions of dollars in deficit reduction to pave the way for a crucial debt limit increase, it is heartening that conservatives are finally recognizing the deficit-reducing potential of eliminating spending in the tax code—and standing up to doctrinaire antitax members of their own conservative coalition to begin eliminating such wasteful expenditures.

This is an area where progressives and conservatives can agree. We can get much-needed revenue without raising rates, reduce the deficit by $1 trillion, and improve the efficiency of the tax code. That’s good news.

Seth Hanlon is Director of Fiscal Reform for the Doing What Works project at the Center for American Progress. Michael Linden is Director of Tax and Budget Policy at the Center.