Info on Tax Expenditures
Last week Bill Galston of the Brookings Institution and Maya MacGuineas of the New America Foundation released a report outlining some suggestions to stabilize the federal debt. Of particular interest is this passage on tax expenditures:
Tax Expenditures
Perhaps the single area in the budget most in need of reform is the “tax expenditure” portion. Tax expenditures are the targeted deductions, exemptions, exclusions, and credits that honeycomb the U.S. tax code. They are immensely popular with elected officials: What politician would not prefer to provide a benefit through a “tax cut” rather than a new spending program? Predictably, this incentive has sparked a tremendous expansion in the use of tax expenditures, which now amount to more than $1 trillion per year.
When the deficit commission meets to consider recommendations in November, tax expenditures could represent one area of possible bipartisan agreement. The Obama Administration included in its budget submission an analysis of tax expenditures’ performance, noting that “they add to the complexity of the tax system, which raises administrative and compliance costs.” Some Republicans have talked about tax expenditures as well, and drawn praise from liberal quarters for doing so.
One significant potential obstacle to a bipartisan agreement on tax expenditures is the fact that health insurance subsidies will soon be one of the largest expenses in the entire tax code. The Congressional Budget Office found that in 2016, once the coverage expansions are almost fully phased in, the federal government will be paying out $77 billion in “exchange subsidies and related spending.” According to Table 16-3 of the Administration’s budget analytical perspectives volume, such a level of spending would rank third among all tax expenditures for the current fiscal year, behind only the $177 billion employee exclusion for group health insurance and the $104 billion mortgage interest deduction. (Unfortunately, OMB’s budget submission didn’t include projected tax expenditure data for 2016, so an apples-to-apples comparison isn’t possible here – but as health care spending is projected to grow faster than the economy as a whole, it’s likely the insurance tax subsidies will be among the top three tax expenditures within a few short years.)
So when Democrats make claims that the health care legislation is the “largest middle-class tax cut for health care in history,” they’re not just incorrectly reading the text of the legislation itself (Section 1412(c)(2)(A) of H.R. 3590 states that tax credits shall be paid “to the issuer of a qualified health plan”). By claiming that government spending (i.e., payments to insurance companies) constitutes a tax cut, they’re also undermining the potential basis for long-overdue tax reform that would examine all tax expenditures, including the massive new spending included in Obamacare.