You’d think that Congress would have kept the fiscal cliff negotiations as simple and tight as possible. The size of the deficit, the threat of automatic spending cuts, and the need for a last-minute tax deal deserved everyone’s full attention. And yet, the Congressional Budget Office breakdown of the bill shows that there were all sorts of goodies buried in the fine print, benefiting everyone from filmmakers to rum distillers. The problem is so-called “tax expenditures,” which are basically ways to subsidize various kinds of activities through tax breaks (as opposed to direct payments). The fiscal cliff deal consists of three parts – personal taxes, business taxes and energy taxes – and each includes its own giveaways.
Many of these were simply increases or extensions of tax expenditures that already existed. And some of them may be perfectly reasonable public policy. Perhaps it’s worthwhile to spend an additional $9.7 billion over the next 10 years on additional subsidies for student loans or $5.6 billion for adoptions, although both those figures seem like a lot considering that employer-provided childcare is getting only $209 million. More money is at stake in subsidies for various businesses, $46 billion, and for alternative energy, $18 billion. But even when those tax expenditures are justifiable, they merit separate and thorough discussion, rather than being mixed into what is supposed to be a debate over personal income tax rates.
Moreover, there are plenty of lesser tax expenditures that seem to deserve some skepticism. Indeed, Senator McCain criticized such tax benefits last week, saying that “special-interest giveaways,” including a $15 million subsidy for asparagus growers, would feed cynicism at a time when tough choices have to be made about the deficit. Here’s a quick look at where some of the other small bequests are going:
Railroad tracks. A special 50% tax credit for maintaining tracks is projected to cost $331 million over the next two years.
Racetracks. Tax benefits for certain motorsport racing track facilities will cost more than $100 million over the next seven years.
Native Americans. Business property on Indian reservations will receive $660 million in tax breaks over the next three years. Indian employment tax credits will total $119 million over the next four years. Tax breaks for Alaskan Natives receiving trust income will add up to $46 million over 10 years.
Charities. More favorable deductions for contributions of food to charities will cost $314 million over two years. For contributions of property, the benefit will be $225 million over a decade.
Movies and TV. In a fiscal cliffhanger, film and television production got the last-minute extension of tax write-offs worth $430 million over the next two years. The provision received bipartisan support – from California congressmen, of course.
Caribbean islands. Businesses in Puerto Rico will receive $358 million over the next two years. In addition, a temporary increase in the excise tax rebate on rum production will give Puerto Rico and the U.S. Virgin Islands $222 million, much of which will go to benefit local rum distillers.
Foreign investors. Regulated Investment Companies, such as mutual funds and real estate investment trusts, are to receive $211 million in tax benefits over the next two years. Some of that pertains to dividends paid to foreign investors.
Samoans. Over the next two years, additional economic development credits for American Samoa will cost $62 million.
Electric motorcycles. Over the next three years, $7 million will go to expand credits for plug-in electric vehicles to include motorcycles.
Algae. Providing credits for fuel made from algae and expanding benefits for certain other biofuels will cost $59 million.
Biodiesel. Tax credits for renewable diesel fuel and small agricultural producers of biodiesel will total a hefty $2.2 billion over the next five years. You’d think there would already be plenty of oil available for recycling from restaurant chains that serve french fries.
Other green fuels. Alternative fuels other than liquefied hydrogen will receive $360 million in tax credits over the next two years.
Among more conventional energy-conservation policies, the legislation includes $12.2 billion for the construction of renewable electricity production facilities and $800 million for energy-efficient homes and appliances.
It’s entirely believable that some of these projects are worthwhile. But stuffing them into emergency legislation that is being passed on a tight deadline ensures that incidental provisions won’t be examined closely. Surely the big-money items deserve their own bill. If we’re going to spend billions on green energy projects, that should be covered in separate legislation with a time frame that allows for analysis and discussion.
In addition, there’s an extraneous provision that allows workers to convert conventional 401(k)s into Roth 401(k)s at a cost of $12.2 billion over the coming decade. While that may be beneficial for certain older workers, it appears chiefly to be an attempt by the government to generate some quick tax revenue with much greater long-term cost.
At the opposite extreme, all the little projects seem to have been shoehorned into the bill precisely because they won’t get much scrutiny. It’s hard not to be suspicious about a one-year $1 million credit for the production of coal on Indian land at a time when the government is generally discouraging coal production elsewhere.
Most of these benefits pale, however, in comparison with the big tax breaks that went to private equity and hedge funds. Among these provisions is the continuation of so-called carried interest, which in effect allows sophisticated investment managers to postpone their earnings from a deal and then often pay taxes at capital gains rates that are lower than the rates for fee income. Turns out that there was no need for a Mitt Romney presidency to preserve Mitt Romney’s tax rate.
