Tightening of tax breaks seen as tool to cut deficit Exemptions to cost U.S. more than $400 billion in '93

July 26, 1993|By Karen Hosler | Karen Hosler,Washington Bureau

WASHINGTON -- To cut the federal deficit, you've either got to raise taxes or cut spending, right? Well, here's another option: getting rid of tax loopholes that will cost the federal government more than $400 billion this year.

Every time Congress grants one group of taxpayers a special break on what they would otherwise owe, it costs the federal government.

For example, doing away with the income tax deduction for interest on home mortgage payments would save the federal government $48 billion a year -- almost as much as President Clinton wants to raise in new taxes.

Closing the loophole for contributions that employers make toward worker health and pension benefits would save $103 billion this year and slash the $300 billion deficit by one-third.

There are nearly 100 other tax breaks -- including child care expenses, depreciated business equipment, charitable contributions, club dues, preservation of historic structures, investments in Puerto Rico -- that constitute a huge, unchecked and largely ignored source of revenue for balancing the federal budget.

Sen. Bill Bradley, a New Jersey Democrat, warns: "The game will keep going until the public understands two things: that spending through the tax code has the same effect on the deficit as any other kind, and that any time a tax break is granted it means everybody else has to pay more."

Most of these loopholes were added to the law long ago for purposes both noble and greedy, but sometimes forgotten and rarely reconsidered.

The collection of credits, allowances, deductions, exemptions and exclusions is growing in cost at a rate of 30 percent over the next four years. It is almost as big a share of the federal purse as appropriated funds, including spending for both defense and domestic social programs -- most of which are being frozen or cut.

Cost of loopholes grows

As for automatic benefit programs that also get blamed for the bloated deficit, only Medicare and Medicaid -- health care programs for the elderly and poor -- are growing faster than tax loopholes, according to Senate Budget Committee data. And they still have a way to go to catch up in terms of total cost.

With a projected increase of about 60 percent by 1997, Medicare and Medicaid are expected to cost the federal government $365 billion by then, compared to $526 billion in tax losses through loopholes.

Mr. Bradley, Sen. James Sasser of Tennessee and a handful of others argue that unless Congress is forced to re-evaluate these tax favors, it will be impossible to get the deficit under control.

"The problem is once these things get into the tax code, they stay there," said Mr. Sasser, a Democrat who chairs the Senate Budget Committee. "We need some way to focus public attention on them. Tax expenditures ought to be reviewed with the same diligence as other spending."

He and Mr. Bradley say all tax breaks should be subject to "sunset" provisions, which means they would automatically expire unless Congress votes to extend them.

But many legislators, particularly Republicans, are not comfortable with the notion that eliminating tax breaks for a particular group is the same thing as cutting spending.

When President Clinton included in his list of spending cuts this year a proposal to save $32 billion over five years by reducing tax breaks for Social Security beneficiaries who have outside income of more than $25,000 a year, Republican lawmakers hooted in derision.

"If people who contributed to the Social Security fund all their life have to pay higher taxes on the money they get back, I'd certainly call that a tax increase," said Don Nickles of Oklahoma, chairman of the Senate Republican conference.

Some of the biggest loopholes, such as deductions for home mortgages and property taxes, have come to be considered by most taxpayers as a virtual right of citizenship, even though they amount to housing subsidies far in excess of anything being provided for the poor.

"We wouldn't save any money by getting rid of the home mortgage deduction," one Senate staff aide joked. "We'd have to spend everything we saved to protect Congress from angry taxpayers who would storm the place."

But the mortgage deduction could be limited, for example, by excluding the most costly real estate, Mr. Bradley said.

And the tax code is full of other breaks with a narrower impact, including the 50-year-old credit program for U.S. companies that invest in Puerto Rico that now costs nearly $4 billion a year.

The Puerto Rican credit, which was created to help provide jobs on the island, is considered by Mr. Sasser to be among the worst examples of spending through the tax code because it encourages the loss of jobs in this country.

But it has powerful advocates among the New Jersey-based pharmaceutical companies that have made great use of the credit, as well as with New Yorkers fearful that a loss of jobs would increase the flow of immigrants to the state.

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