WORRIED at the prospect of still larger losses in federal aid, city mayors have been reminding Congress that, contrary to administration rhetoric, increases in direct social spending do not account for the recent burgeoning of the federal deficit. They point out that some of the biggest, fastest growing and least efficient government subsidies are to be found on the revenue rather than the spending side of the budget ledger.
As far as the deficit is concerned, it makes no difference at all whether the government hands out a dollar in direct benefits to someone or cuts his taxes by that amount. The difference, as the mayors point out, comes in the type of people who get the benefit, the efficiency of the subsidy in achieving its intended purpose, and the amount of congressional and administrative oversight it gets. In most cases, the tax subsidy is the inferior vehicle for accomplishing a social purpose.
A tax subsidy is worth most to people or firms with high incomes, since they have the most money to invest and would otherwise face the highest tax rates. It is rarely an efficient subsidy mechanism, since most of the tax breaks simply reward activities that are already going on. And since neither Congress nor the administration regularly reviews the costs and benefits of tax subsidies, they tend to grow to enormous proportions and be used for purposes that no one envisioned.
Housing subsidies provide an excellent case study. Tax subsidies in this area -- housing bonds, rapid depreciation, capital gains deferrals, mortgage interest and property tax deductions and rehabilitation tax credits -- cost the Treasury more than $61 billion a year. By contrast, the government spent only $13 billion on direct housing subsidies last year, and the administration wants to cut that by over half next year.
Moreover, as a new study for the League of Cities shows, upper-income families are the chief beneficiaries of tax subsidies, including more than $1 billion a year for vacation-home deductions. Moderate-and low-income households receive little or no benefit. Direct housing subsidies, by contrast, are focused on lower-income households, although only one in five receives any housing aid.
Tax subsidies for home ownership and construction have, of course, given this country a very high standard of housing for most people. But the mayors have raised an important point. As Congress moves to reduce budget deficits, both fairness and efficiency require that it look at all facets of government social policy -- including tax expenditures and credit activities -- and not just at the small and shrinking programs of direct aid.