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Americans may have voted for change in November, but for now it is business as usual in Washington. Just take a look at the messy tax legislation that is working its way through Congress under the euphemism of a 'tax-extenders' bill.
This legislation is a stew of unrelated credits and tax breaks thrown together in one pot with no consistent philosophical underpinning. Members of Congress and the special interests who command their attention will marinate bits and pieces together with a few items of importance, most especially the yearly adjustment to the Alternative Minimum Tax, to garner wide support. That will help ensure that relatively few members of Congress will stand up and simply say 'no' to the whole mess. In the process, no one will make a serious effort to determine what this batch of credits will cost the national treasury, let alone examine the economic consequences of many of these items.
Last month, more than 1,300 otherwise unrelated businesses, trade groups, nonprofits and advocacy groups sent a letter to Congress urging passage of the tax extenders bill, pushing Congress to renew more than 130 tax credits that are expiring, or that expired last year and need retroactive renewal so that Americans can claim them on this year's tax filing.
These diverse and unconnected tax expenditures include the Low Income Housing and New Markets Tax Credits touted by nonprofit housing groups, four different tax subsidies for biofuels, a tax deduction for teachers who use their own money to buy educational materials, a continued federal subsidy for state and city borrowing via the Build America Bond program, a credit for those who build energy efficient homes, an enhanced charitable deduction for those who donate food, and adjustments in the deductibility of the interest on student loans. And that's just the tip of the iceberg.
One thing that advocates of these and other credits do not want is anything so controversial that it might actually derail the bill. That's why the far more important debate about what to do with the Bush tax cuts is proceeding on an entirely separate track. With or without the Bush tax cuts, Washington will pass the tax extenders bill.
By throwing the rest of these credits into a gigantic brew Congress pretty much guarantees that opposition to individual proposals will melt away. For instance, powerful Iowa Congressman Chuck Grassley has been a prominent critic of the Build America Bond program, worrying about the steep fees Wall Street charges and how the bonds are priced. But Grassley recently admitted in the Wall Street Journal that the BABs program was likely to wind up in a tax extenders bill because, "It's hard to argue if we want to quickly get a [tax] bill passed to say 'everything except BABs.'"
Of course, if you load tax legislation up with enough credits, you're likely to get the same lack of opposition from nearly every senator or representative. Grassley, for instance, comes from an agricultural state and has been campaigning for renewal of ethanol and biodiesel credits, so it's not surprising that his opposition to BABs might disappear in exchange for items he wants passed.
The very fact that the ethanol credits exist in the first place is testament to how Washington works. Al Gore, who as vice president cast the deciding vote in 1994 to establish the credits, now admits that bio-fuels aren't a good idea. And in a rare bit of candor he says one reason he voted for them back then was because farmers in Iowa, a key state in the parties' presidential nominating process, favored them.
The 130 or so tax credits up for renewal in this year's legislation represent the worst of our tax system. For one thing, they are not really tax breaks. They are expenditures that Washington is making to encourage certain activities, from investment by farmers in new machinery to charitable donations of computers by businesses to schools. But by calling them tax credits Washington makes these spending items sound like something more benign.
Few voters are fooled anymore. The National Commission on Fiscal Responsibility and Reform chaired by Erskine Bowles and Alan Simpson recently recommended eliminating more than $1 trillion in tax expenditures to help cut the federal deficit. That gives you an idea of just how much money we're spending through our plethora of tax breaks and credits.
The real question is whether the next Congress, with so many members elected as reformers, will act any differently. When these new members start challenging special interest tax breaks, they'll be taken aside by the Washington-as-usual crowd and told that if they oppose too many items they might not get tax breaks that constituents in their home state or district want. The would-be reformers will be lobbied by advocacy groups representing powerful constituencies, from senior citizens organizations to public employee unions to trade groups representing industries in their home districts. If our congressional reformers are too insistent on real change, they'll be denounced by these groups in their hometown newspapers as uncaring or out-of-touch with local concerns.
What the new Congress will learn is that you can't break the hold that special interest groups have on our tax code by individually attacking each expenditure. You'll be bled to death by a thousand small cuts. The only hope for reform is comprehensive tax legislation that simplifies our tax code by eliminating most, if not all, tax expenditures in exchange for lower rates for everyone. Until Congress has something like that before it, we'll continue to get the kind of ugly tax legislation making its way through Congress right now.
This article first appeared on RealClearMarkets.