USA Today
Gregory Korte
09/14/2013
WASHINGTON — So-called "tax expenditures" — those deductions, credits, exclusions, loopholes and other goodies that clutter up the tax code — now amount to nearly $1.2 trillion a year, the government says.
But it's not all corporate tax giveaways and special-interest handouts: More than 90% of federal tax breaks go to individual taxpayers.
Since the government started accounting for tax preferences in 1974, the value of individual tax breaks has increased seven times faster than that of corporations, according to a USA TODAY analysis of tax expenditure data collected by the National Priorities Project.
"One of the things that we found — and it's perhaps the underlying reason why the tax conversation is so complicated — is that the tax code really does cut across people of all income brackets in this country. Every income group gets some kind of tax expenditure," said Jo Comerford, the group's director. "It flies in the face of the myth that tax expenditures return only to corporations, when the fact is they return by and large to individuals."
And many of the most popular individual tax breaks are among the fastest-growing. Individual taxpayers are likely to save a total of $45.8 billion in 2014 because of a provision exempting home sales from capital gains taxes — nearly double the amount from five years before.
Non-taxable Social Security benefits will save retired and disabled people $32.9 billion — up 59% since 2009. And employees will save $212.8 billion because their employer-provided health benefits aren't taxed — a 47% increase from 2009.
But those cherished individual tax breaks could complicate what seems to be the most serious effort by Congress to overhaul the tax system in 27 years. The Tax Reform Act of 1986 tamed individual tax breaks for nearly a decade — until Congress added in more tax breaks in a 1997 law that cut capital gains tax rates, exempted taxes on most home sales, and enacted a child credit.
Most of the recent growth in individual tax breaks is attributable to economic factors: a rebound in the housing market, increased health care costs and increased 401(k) contributions.
"The other major factor to explain it is the growth on the individual side is because the tax code has been used as an additional means to provide welfare spending," said William McBride, the chief economist at the business-oriented Tax Foundation. "They've just grown and grown."
McBride argues that some popular low-income tax benefits like the earned income tax credit and the child tax credit are, in some ways, worse than welfare spending. They're less transparent, more open to abuse, face less congressional oversight and are poorly administered by the Internal Revenue Service, he said.
On the other end of the spectrum are critics of the preferred treatment of capital gains and investment income in the tax code.
"Everybody wants to raise revenue by getting rid of tax expenditures, but I think people are focused on the wrong ones," said Steve Wamhoff, legislative director of Citizens for Tax Justice. "If you have a spending program and 68% of that money goes to the richest 1%, most people would think that's pretty bad."
That's what the lower rate for capital gains does, according to a Congressional Budget Office report released in May.
The two lawmakers tasked most with writing tax laws — Senate Finance Committee Chairman Max Baucus, D-Mont., and House Ways and Means Committee Chairman David Camp, R-Mich. — have endorsed a "blank slate" approach to tax reform, eliminating all tax breaks and forcing their colleagues to justify adding them back in. They've just returned from a bipartisan summer tour of the country to get input from taxpayers and sell the concept.
"There is more agreement on the corporate side," Baucus told The Washington Postafter a stop last week in Memphis to talk about tax reform at the FedEx hub. "But I think we should use that as an engine for comprehensive reform, not just do corporate and stop."
The National Priorities Project, a Massachusetts-based non-profit group that researches federal budget issues, collected cost estimates for 296 tax expenditures dating to 1974, when the government first started disclosing them in annual budget documents.
Becky Sweger, the group's director of data and technology, said most Americans don't think of tax breaks as spending — partly because some of them are breaks they never see, like the exclusion of employer health plans.
"I used to think, 'Who gets all these horrible tax breaks?' And when I charted those, I saw the top three are me. I get all of those," she said.
