U.S. lawmakers return this week from their holiday recess to perform what has become an annual ritual: pretending to decide whether to extend dozens of temporary tax breaks.
The just-expired shelters -- for Hollywood filmmakers, rum producers and dozens of other constituent groups -- are a showcase for why the U.S. tax code is so mind-numbingly complicated and overdue for simplification. There are 55 breaks in all, costing taxpayers about $50 billion annually.
They are the essence of special-interest legislating. Every year or two, lawmakers lament that the tax breaks are oh so expensive; anxious lobbyists attend their fundraisers over the recess, campaign checks in hand; when Congress resumes, lawmakers somehow find a way to pass the tax bill, adding a few new breaks on top of the perennials (all retroactive to Jan. 1, of course).
It’s crazy for Congress to be in this business at all. The best remedy would be a top-to-bottom tax-code housecleaning. Instead of granting special-interest favors through the annual pay-to-play ritual, throw out the thousands of exclusions, credits and deductions -- then lower rates for individuals and corporations alike.
Granting tax breaks on a temporary basis only makes matters worse. Millions of taxpayers are left hanging when Congress leaves town without renewing them. Consumers and corporations can’t plan for their tax liabilities, so they postpone their spending and investment, leading to stalled economic growth and fewer new jobs.
Sadly, there’s no immediate prospect of comprehensive reform. In the meantime, it’s worth distinguishing among the defensible, the indefensible and the downright ridiculous. Closing the stupidest tax breaks shouldn’t have to wait. And in this respect, the automatic expiration of so many provisions could be a blessing in disguise. Congress can abolish the worst by simply letting them die.
Pending comprehensive reform, some deductions are worth preserving -- one for teachers who buy their own school-room supplies, for instance, and one that relieves underwater homeowners from having to pay taxes on forgiven mortgage principal. The research-and-development tax credit mitigates the too-high corporate tax rate and gives innovative companies a boost. Some provisions might be worth retaining if their design could be improved, such as the tax credit for wind power that isn’t available to all low-carbon power sources and can therefore skew markets.
In the realm of the ridiculous are an excise-tax rebate for Caribbean island rum distillers and accelerated write-offs for Nascar racetrack construction. The financial-services industry is lobbying hard to win renewal of a 13-year-old break, costing more than $9 billion a year, to shelter revenue from overseas lending.
In general, breaks aimed at single industries or companies should go. Typically these have more to do with lobbying and campaign contributions than fiscal logic. Incentives that promote job creation and innovation are worth retaining. Likewise, breaks that make the code more progressive by favoring middle-income households, such as one for making homes more energy-efficient, are justified as part of a less-than-ideal system.
Congress shouldn’t lose sight of the fact that comprehensive tax reform is the right answer. Until then, mini-reform is better than none.
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