Similarly, when President George W. Bush wanted to help victims of the Sept. 11, 2001, attacks, he turned to the tax code. He backed the Victims of Terrorism Tax Relief Act, which wiped out two years of tax liability for survivors and created a continuing exemption for annuities paid to families of public-safety officers killed in the line of duty. Estimated 10-year price tag: $360 million.
In 2009, when Obama wanted to boost the flagging economy, he offered a massive new tax break as the centerpiece of his stimulus package. The Making Work Pay credit put about $60 billion a year in people’s pockets in 2009 and 2010, including $18 billion in “refundable” payments to low-income families whose tax bills were so small that the government had to write them checks to make sure they received the full value.
Into the U.S. tax code, break by break: Explore the 172 tax breaks currently on the books
President Barack Obama is expected to seek a new base tax rate for the wealthy to ensure that millionaires pay at least at the same percentage as middle income taxpayers. The proposal will be officially unveiled on Monday. (Sept. 18)
This week, Obama is expected to offer an outline for revising the tax code to weed out special tax breaks. At the same time, he is pressing Congress to create several more. His $447 billion jobs package includes a $4,000 credit for hiring people who have been out of work more than six months and a $5,000 credit for hiring returning war veterans.
Administration officials say targeted tax cuts are an easy way to quickly put money in people’s pockets. But they also acknowledged the political reality that lawmakers are more inclined to support a plan that cuts taxes than one that increases spending.
Hard benefits to break
Once a tax break is ensconced in the code, it is hard to dislodge. Beneficiaries become fierce defenders, as do anti-tax conservatives, who view the end of a tax break as an impermissible hike in overall tax collections. About 95 percent of Republicans in Congress, and a few Democrats, have signed a pledge circulated by GOP strategist Grover Norquist vowing to “oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”
The pledge, which Norquist has been circulating for 25 years, promotes “a nonsensical debate that says we’re not going to talk about spending in the tax code like we talk about other spending,” said Eugene Steuerle, an architect of the 1986 tax overhaul while working in the Reagan Treasury Department and now a senior fellow at the Urban Institute. “Spending in the tax code is granted a superior status, and if you get rid of it, it’s called a tax increase.”
Simply limiting the cost of a tax break can be politically perilous. Norquist’s group, Americans for Tax Reform, recently issued what it called a “comprehensive list of Obama tax hikes.” Among the items: The reversal of a 2003 Internal Revenue Service ruling that allowed people to use pretax health spending accounts to pay for over-the-counter drugs. The group has dubbed the change the “medicine cabinet tax.”
Even temporary tax breaks have proved remarkably resilient. Congress routinely passes a “tax extender” bill that renews a host of expiring provisions worth about $30 billion a year. One of the most expensive: a break for residents of states that levy no income tax, including Texas and Florida. Congress has agreed to let them deduct sales taxes instead, at an annual cost to the Treasury of about $1.8 billion.