Tax reform a daunting task, report illustrates

Reuters News
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Posted: Jan 17, 2012 7:33 PM
Tax reform a daunting task, report illustrates

By Kim Dixon and Patrick Temple-West

WASHINGTON (Reuters) - Government spending does not just occur in the federal budget. A lot if it occurs through tax breaks and a report on Tuesday showed how increasingly costly they are as lawmakers mull a revamp of the tax code.

At $1.3 trillion a year, the federal deficit is aggravated not just by budgeted spending, but by tax breaks too, ranging from the massive healthcare exclusion to small energy tax credits, said the report, from a bipartisan congressional panel.

The Joint Committee on Taxation said that the tax exclusion for employed-provided healthcare will cost the government $725 billion over five years from 2011 through 2015. That estimate is up 10 percent from the JCT's last estimate in December 2010.

The exclusion is the tax break that U.S. workers get for buying health insurance through their employers. It is the largest single break, or tax expenditure, on the books.

The JCT estimates come out annually and are under increased scrutiny as Congress considers tax reform and grapples with the cost of tax breaks that benefit everyone from corporate America to middle-class homeowners to hybrid-vehicle makers and buyers.

On the campaign trail, a tax code overhaul has been a major issue, but few Republican presidential candidates have volunteered details on tax breaks they would like to eliminate.

President Barack Obama's deficit reduction panel recommended slashing or reducing tax breaks as a way to broaden the tax base and lower rates. But special interests are dug in deep to defend their tax breaks and little progress is being made.

'A BIG FIGHT'

"I see just a big fight," said George Yin, a tax professor at the University of Virginia Law School and JCT chief of staff from 2003 to 2005.

"You can't even dismiss the little, itty-bitty ones," Yin said referring to small exclusions.

"Every single one of those things, there's a group of people, it's their whole life's work tied up in this and they are going to lobby like heck."

The JCT report "kind of illustrates very nicely how daunting the task will be," Yin said.

Corporate America has long complained about its 35 percent top income tax rate, and some have said they would accept eliminating special deductions in exchange for a lower rate.

Among corporate tax breaks, the 2011-2015 cost to the U.S. budget of letting companies defer paying taxes on profits overseas will be an estimated $86.7 billion, JCT said, up from an estimated $70.6 billion just last year.

U.S. companies often stash earnings abroad, rather than take a tax hit by bringing them into the United States.

Companies are lobbying in Congress for a permanent holiday from overseas taxes on their profits, but critics say that would only encourage companies to send more jobs and cash abroad.

The five-year cost of the tax deduction for home mortgage interest fell to $464.1 billion from $484.1 billion in the last estimate.

(Reporting By Patrick Temple West and Kim Dixon; Editing by Kevin Drawbaugh and Steve Orlofsky)