Special interests win in Senate panel’s attempt at tax reform

Correction: An earlier version of this article was unclear in describing proposed changes to a tax credit for electric motorcycles and three-wheeled vehicles. The committee voted to preserve the credit, but only for vehicles fast enough to travel on public roadways. Slower vehicles, including golf carts, would no longer be eligible. This version has been modified.

It was supposed to be a first step toward tax reform. But as lawmakers tackled a list of 75 special-interest tax breaks, the special interests repeatedly won.

An accelerated write-off for owners of NASCAR tracks: That has to stay.

An economic development credit for a StarKist tuna cannery in American Samoa: That stays, too.

A rum-tax rebate for Puerto Rico and the U.S. Virgin Islands worth millions of dollars a year to one of the world’s largest distillers: Check.

A $2,500 credit for electric motorcycles and three-wheeled vehicles: That stays. But “in the spirit of tax reform,” its sponsor, Sen. Ron Wyden (D-Ore.), said he agreed that slower vehicles such as electric golf carts that cannot travel on public roadways would no longer be eligible.

When the dust settled Thursday, members of the Senate Finance Committee congratulated themselves for agreeing to jettison 20 of the perks, including a $5,000 credit for first-time home buyers in the District and a cash-incentive program for ­wind-energy projects that has been derided as benefiting foreign companies.

But their failure to weed out dozens more pet provisions clouded prospects for a far-reaching simplification of the nation’s tax laws advocated by President Obama, GOP challenger Mitt Romney and congressional leaders in both parties.

“The opening salvo of tax reform was little more than a whimper,” said Steve Ellis, vice president of the nonprofit watchdog group Taxpayers for Common Sense. “If this is as bold as they’re going to go, it doesn’t bode very well for fundamental reform.”

Rather than criticize themselves for not hacking through the layers of loopholes and tax favors, committee leaders noted that they had, for the first time in memory, refused to automatically renew them all. Thursday’s 19 to 5 vote not only reversed a decades-long trend, they said, it demonstrated a rare ability to work across party lines at a time when a protracted stalemate over taxes and spending threatens to throw the nation back into recession early next year.

“By doing this, we’ve come a long way toward functionality,” said Sen. Orrin G. Hatch (Utah), the panel’s senior Republican. “This is a major achievement. It certainly is not tax reform. But . . . it’s a step in the right direction.”

“I’m proud of what we’ve done as a committee,” added Finance Committee Chairman Max Baucus (D-Mont.). It’s “more than baby steps. This is not the first steps the baby’s taking. We’re walking.”

With Congress headed home for an August recess, the full Senate cannot vote on the measure until at least September. If approved, it would face an uncertain fate in the House, where the Ways and Means Committee is also reviewing the temporary tax breaks collectively known as “tax extenders” because Congress has not made them permanent.

The provisions are instead regularly renewed for a year or two “in the dark of night,” as Hatch put it, often as an amendment to must-pass bills. In 2008, for example, the Senate tacked them onto the Troubled Assets Relief Program bank-bailout legislation.

The extenders include many popular provisions, such as a credit for domestic research and development and a deduction for college tuition. The package approved Thursday also would protect millions of middle-class families from the alternative minimum tax through 2013, by far the most costly provision.

All told, the measure would add $143 billion to next year’s budget deficit, according to of­ficial estimates, with about $40 billion going to the special-interest breaks. Over 10 years, the cost would swell to $205 billion.

In a tentative deal reached late Tuesday, Baucus and Hatch agreed to wipe out more of the loopholes. But lawmakers in both parties appealed, and Baucus presented a rewrite Thursday morning that brought several back to life.

Lawmakers were by turns defiant and sheepish in defending favored provisions. The breaks, they said, are critical to home-state employers facing a tough economy. It would be easier to wipe them out, they said, as part of full-scale reform, when Congress can offer lower tax rates as a consolation prize.

“Big tax reform is where we need to look at all this stuff,” said Sen. Debbie Stabenow (D-Mich.), who joined Sen. Jon Kyl (R-Ariz.) in petitioning Baucus to preserve the break for NASCAR tracks.

For now, Stabenow said, the write-off for improving the tracks is “an economic development issue for Michigan,” where owners of the Michigan International Speedway west of Ann Arbor recently added 20 deluxe track-side camping spaces.

Sen. John Thune (R-S.D.) defended an array of energy incentives, including a wind-energy tax credit that Romney has targeted for elimination.

“The bigger game is going to be tax reform. This is just kind of the opening act,” he said. “I’ve made that pretty clear to folks in the industry” that when tax reform gets underway, “we’ll need to look at what we can do to start phasing these things out.”

Sen. Jeff Bingaman (D-N.M.), who has jurisdiction over U.S. territories as chairman of the Committee on Energy and Natural Resources, said he asked Baucus to save the credit for American Samoa, which has, in the past, subsidized a StarKist tuna cannery that employs more than half the island’s population.

“Samoans are U.S. citizens. This is a U.S. territory,” Bingaman said. “We should not in a casual way take action that would dramatically and adversely affect their economy. If the next Congress thinks there are good and sufficient reasons for doing that, then that’s their business.”

Asked why the Samoan credit was preserved, Baucus said simply: “Jobs.”

Still, the scramble to preserve narrowly targeted perks left some steaming.

“Nobody wants to make the hard choices around here,” said Sen. Tom Coburn (Okla.), one of five Republicans who voted against the measure. Getting rid of 20 tax breaks is “better than nothing. But it ain’t anywhere close to where we need to be if we’re going to fix this country.”

“They’re good people,” he said of his Senate colleagues, “but I don’t get it.”

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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