WASHINGTON — In a rare sign of bipartisanship, the Democrat who chairs the Senate Budget Committee and a Republican agreed Thursday that curbing or eliminating tax expenditures should be the centerpiece of a tax-reform package, which is needed to the reduce the nation’s federal deficit and improve anemic economic growth.
“The state of the tax code is simply indefensible,” committee chairman Sen. Kent Conrad, D-N.D., said at a hearing on tax reform. “It is completely out of date.”
The retiring senator said the tax code is stuffed with loopholes, deductions, exclusions, and countless preferences. Tax expenditures, Conrad said, “are really just spending by another name.”
“Scaling back tax expenditures should be at the heart of any tax reform we consider,” he said.
A simpler tax code would remove the nearly $1.2 trillion in annual tax expenditures and allow for reduced rates, additional revenue, and improve the economy’s efficiency, Conrad said.
His remarks hearken back to proposals by two commissions that called for curbing or eliminating tax-exempt interest on new municipal bond as well as other tax expenditures. Conrad and other tax experts have estimated that the total cost of tax expenditures amount to nearly as much as federal budget discretionary spending combined.
“I think it’s important for the government not to be picking winners and losers, for politicians not to be deciding what activities should be subsidized and which ones should be favored and which ones shouldn’t,” said Sen. Pat Toomey R-Pa., a Tea Party favorite, who said he has been a “big fan” of a mechanism to reduce the value of deductions to generate offsetting revenue.
At the beginning of the year, the nonpartisan Joint Committee on Taxation released its annual tax expenditure estimates, which showed the tax expenditures associated with public-purpose muni bonds totaled $177.6 billion over five years. Tax-exemption receives perennial attention from tax experts because it is one of the largest individual income tax expenditures, but it still doesn’t make either the JCT’s or the Obama administration’s top 10 list.
Conrad also stressed that the President’s 2010 National Commission on Fiscal Responsibility and Reform should be used as a framework for tax reform because it eliminates or scales back tax expenditures — including elimination of tax-exemption for new bonds — among other things, and lowers tax rates.
That commission was led by Democrat Erskine Bowles, former chief of staff to President Bill Clinton, and former Sen. Alan Simpson R-Wyo. Its 65-page report contained an “illustrative individual tax-reform plan” recommending that there be no tax-exemption for new muni bonds.
The budget committee hearing’s strong focus on eliminating or scaling back tax expenditures as part of tax reform heightens the threat to tax-exemption. Even though tax reform is unlikely to be seriously discussed until after the November election, muni market participants and state and local groups are talking with lawmakers about the importance of maintaining tax-exemption and the negative impact it would have for state and local governments.
Leonard Burman, a professor at Syracuse University and a former director of the Tax Policy Center at the Urban Institute, who was a witness at the hearing, recommended using the Bowles-Simpson commission proposal and the Bipartisan Policy Center task force as frameworks for tax reform.
“Eliminating or scaling back inefficient tax expenditures is a way to reduce the size and scope of government, just as cutting direct spending would do,” Burman said. Tax expenditures increased by 60% between 1996 and 2006, he said.
In a sign that more lawmakers are coalescing around the idea of reducing tax expenditures, earlier this week House Minority Whip Steny Hoyer, D-Md., urged Congress to “go big” on deficit reduction and said he believes there is “broad consensus” for a comprehensive plan similar to the one proposed by the Bowles-Simpson commission.
He also said there is a bipartisan, bicameral group of lawmakers working on a balanced package of deficit reduction package that would replace the $1.2 trillion in automatic spending cuts mandated by law at the end of the year.