The current budget impasse in Washington is easier to summarize than resolve. A necessary increase in the debt ceiling will require a budget agreement. Any deal will consist mainly of spending reductions. “But if we are talking about trillions,” says Donald Marron, director of the Tax Policy Center, “that is an awful lot of money to move without concessions.” Democrats will insist on some revenue increases. Republicans won’t accept tax increases. Yet stalemate involves unacceptable economic risk.
To resolve this conundrum, it is necessary to identify a category of government revenue increases that aren’t considered tax increases. Economists call these “tax expenditures” — credits and deductions that are actually a form of hidden government spending. Consider the example of the mortgage interest deduction for second homes. “This is a kind of upper-middle-class entitlement program run through the tax code,” says Marron. The same policy goal could be accomplished by simply sending checks to qualifying taxpayers. Many conservative economists would regard the end of this deduction as a limit on government activism, even though it would make official revenue larger. But the author of the Taxpayer Protection Pledge — Grover Norquist of Americans for Tax Reform — does not agree.
Which has led to the great ethanol debate of 2011. In the world of economic conservatism, Norquist and Sen. Tom Coburn (R-Okla.) are both revered figures. But St. Thomas views the $5 billion a year federal tax credit for ethanol blenders as a spending program. St. Grover, adopting a strict interpretation of the pledge, views the elimination of this subsidy as a tax increase. Coburn calls Norquist’s position “a profoundly misguided embrace of progressive, activist government.” Norquist responds that Coburn has “lied” to the people of Oklahoma by modifying his pledge.
It is not a minor disagreement. Tax expenditures — including ethanol subsidies, the mortgage interest deduction, the deduction for state and local taxes, the exclusion of health benefits from income tax calculations, the depreciation allowance for businesses, the earned-income tax credit — amount to hundreds of billions of dollars each year. Cutting some of these subsidies would be unpopular, unwise or both. But taking all tax expenditures off the table would make it difficult to achieve, or even imagine, a budget agreement in the Senate.
To include tax expenditures in their negotiations, Senate Republicans “would need to violate the letter of the tax pledge, while arguing they are meeting the spirit,” says Marron. They would have conservative support, including from think tanks and the Wall Street Journal’s editorial page. Many free-market economists are opposed to government micromanagement of the economy, even if reforms have the side effect of increasing revenue. But explaining this paradox is difficult. “Grover’s task is easy,” says Marron. “He can hold up the Congressional Budget Office score and show that revenues are up.”
Norquist’s role in this debate is the equivalent of the policy veto Democrats often grant to labor unions or the National Education Association. It is hard to fault these advocates for serving their own agendas. But the public interest can be broader.
Coburn has made his position clear. The most important pledge, he says, “is the pledge to uphold your oath to the Constitution of the United States,” not “a pledge from a special interest group, who claims to speak for all of American conservatives when in fact they really don’t.”
It will be difficult, and may be important, for other Republicans to follow him.