Democrats are aiming to reform the way Congress budgets to make it easier to cut tax breaks, an effort that could help the two parties avoid further fiscal crises but also would tip the scales in favor of higher taxes.
As members of the Senate and House budget committees have discussed reforming the budget process in recent weeks with an eye toward legislation before the presidential election, Democrats have focused in particular on the targeted breaks throughout the tax code that, for practical purposes, are the same as spending.
Both parties see fundamental problems with the existing budget process, beyond the fact that it has proved difficult for Congress to follow it recently and that it has yielded several damaging standoffs between congressional Republicans and President Obama in recent years.
One concern in particular is that discretionary spending, meaning spending that Congress must approve, has shrunk relative to spending that happens automatically, such as Social Security, Medicare, Medicaid, Obamacare subsidies and interest on the debt.
That spending, known as “mandatory” spending because it is paid out automatically unless Congress changes the programs, has grown as a share of the budget.
As recently as the 1980s, Congress appropriated the majority of spending. In 2015, however, more than two-thirds of spending Congress did not control, whether it was programs for which people automatically qualify for benefits or interest on the debt.
With spending on old-age programs set to increase as the Baby Boom generation retires, Congress will face more pressure to cut discretionary spending, which includes defense, infrastructure, law enforcement, medical research and everything else for which the government appropriates spending.
To address the problem, Republicans have sought to reform entitlements, including, through Paul Ryan’s budget plans, Medicare.
Sen. Sheldon Whitehouse of Rhode Island, the top Democrat on the Senate Banking Committee while Bernie Sanders is on the campaign trail, has sought to include tax expenditures in the conversation. If a lawmaker wants to create a program, he noted at a recent hearing, he can do so by creating a tax credit for that purpose. By having the IRS, rather than the agency, manage the spending, the program can escape the threat of cuts in future Congresses. As a result, members of Congress have an incentive to create tax credits rather than spending programs.
Such tax expenditures are a big deal: Altogether, they cost the Treasury $1.5 trillion in 2015, according to congressional estimates. Some of the largest breaks include the exclusion of employer-provided health insurance from taxable income, which will save taxpayers $158 billion this year, according to the Joint Committee on Taxation, the $82 billion deduction for interest on mortgages, and the $134 billion preferential tax rates for capital gains and dividends.
So while Republicans are looking for ways to make it easier to rein in entitlement spending through the annual budget process, Democrats want to change the process to make it less conducive to creating tax expenditures.
“How do we bring greater transparency to this, to help with this dialogue with the American people, so that we can address long-term debt?” asked Kathy Castor, D-Fla., at a House Budget Committee hearing on reform Thursday.
“We’ve long advocated the idea that if you’re looking at the spending side of the budget, you should also be including tax expenditures as part of that examination,” said Joel Friedman, a budget expert at the nonprofit Center for Budget and Policy Priorities, a left-of-center think tank.
One of the reasons to target tax expenditures, beyond the budgetary factors, is that they are regressive, meaning that the benefits of the credits, deductions and exclusions benefit high earners more than low-income people. More than half of the largest tax expenditures, such as the mortgage interest deduction, accrue to the top fifth of income earners.
Just how to shift the budget process toward more accountability for tax expenditures is a major question facing budget reformers.
“There is a strong movement amongst budgeteers, including myself, to try to bring in more directly into the budget-making process tax expenditures,” said William Hoagland, a senior vice president at the Bipartisan Policy Center and a former top Senate budget staffer.
Hoagland pointed to two ideas included in a report published last year by former New Mexico Republican Sen. Pete Domenici and former Bill Clinton budget director Alice Rivlin. One possibility would be to create a baseline projection of tax expenditure spending and trigger a review of tax expenditures when those projections are exceeded. Another would be to “sunset” all tax expenditures, meaning that they would be phased out after eight years unless Congress specifically chose to re-up them.
There are political obstacles to any alternative.
First is that Republicans are predispensed to view any “cuts” to tax expenditures as an increase in taxation. Unless tax rates are lowered to offset the revenue raised, eliminating tax expenditures counts as a tax increase under the tax pledge signed by most Republicans that is maintained by the influential conservative group Americans for Tax Reform.
Another is that ending tax provisions has a spotty history. Congress just last year voted to make permanent a set of temporary tax breaks that totaled about a trillion dollars over 10 years. The package of breaks, known as “extenders,” had become a biennial headache for Congress, and many lawmakers would be reluctant to revisit the practice of extending temporary provisions.
Lastly, progressives are wary of caps on tax expenditures the same way they are concerned about caps on entitlement spending.
Caps can help force Congress and the White House to act, but they also can result in counterproductive across-the-board cuts that endanger priorities, Friedman said. That was the case with the spending caps on discretionary spending put in place by the 2011 debt ceiling deal, which ultimately cut into basic research and other key priorities.
The better approach, Friedman said, would be to enact policies undoing some of the less valuable tax expenditures. He pointed to Obama’s budget proposal to limit the value of itemized deductions for high-income households.
But the bottom line is that it would be beneficial to make lawmakers more inclined to find savings through tax expenditures, he said. “Elevating their visibility would help with issues.”
