Tax Breaks Need Scrutiny

Missing Provision in Senate Tax Bill Should Be Reinserted

An important provision calling for ongoing review of special tax breaks is missing from the Senate tax compromise, notes Seth Hanlon. It should be included.

Ethanol producers are among those who benefit from special business tax breaks. A proposed provision in the tax agreement would require Congress to review these tax breaks each year. (AP/Ed Andrieski)
Ethanol producers are among those who benefit from special business tax breaks. A proposed provision in the tax agreement would require Congress to review these tax breaks each year. (AP/Ed Andrieski)

A small but important item is missing from the tax framework bill negotiated by the Obama administration and congressional leaders and introduced in the Senate last night. The provision, which has already been passed by the House of Representatives in separate legislation, would require Congress to evaluate for effectiveness special business tax breaks that Congress renews on a year-to-year basis. The reviews would provide basic information to Congress about whether each of these tax breaks serves its intended purpose.

The provision was included in legislation introduced by Sen. Max Baucus last week and has already passed the House as part of a separate bill. It’s unclear why it was not included in the latest version of tax legislation introduced last night. The Senate and House should make sure it is added back in before the legislation is finalized.

This study is long overdue. About 50 tax provisions are regularly scheduled to expire every year. Many of these breaks benefit targeted industries such as ethanol producers, filmmakers, and financial services companies operating abroad. Congress typically waits until the waning days of the legislative session to take up the tax breaks, then bundles them together in a “tax extenders” bill.

Problem is, there is no systematic process for reviewing the effectiveness of particular tax provisions, so members of Congress have little opportunity to learn about, weigh, or debate their merits. Some of the tax breaks are left out of the final “extenders” package and die off, but Congress usually extends most of them for another year. A tax break’s survival is sometimes just a matter of which lobbyist got the last word in.

The provision in the House legislation, authored by Rep. Lloyd Doggett (D-TX), would require the nonpartisan Joint Committee on Taxation to review each of these so-called “tax extenders” in consultation with the Government Accountability Office and present its findings to Congress. These ongoing studies would evaluate tax extenders on the basis of 10 criteria, all intended to provide Congress with basic information: What purpose do they serve? Do they work? Should they be made permanent? Should they be scrapped?

Most of these tax extenders are part of a broader universe of “tax expenditures,” those special exemptions, deductions, and credits in the tax code that amount to more than $1 trillion a year. Last week, President Barack Obama’s deficit-reduction panel suggested eliminating all but a few tax expenditures. And the president recently said he is contemplating a broad overhaul of the tax code that would reduce tax expenditures.

As policymakers turn their attention to tax expenditures, it’s critical they understand which ones work and which don’t. That’s why the Center for American Progress has emphasized the need for greater scrutiny and transparency of tax expenditures—and the tax extender study is an important step toward this end. As Carl Davis of Citizens for Tax Justice notes, putting the study back in the Senate bill “would signal Congress’ interest in tax reform, deficit reduction, and general government efficiency.

Congress should halt its annual cycle of extending significant and costly tax provisions without reviewing their effectiveness. The tax extenders study has widespread support and should be noncontroversial. Lawmakers should add the missing provision back into the tax bill so that the next Congress can finally make well-informed decisions about which tax breaks are worth keeping.

Seth Hanlon is Director of Fiscal Reform for CAP’s Doing What Works project.

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Seth Hanlon

Former Acting Vice President, Economy