Pete Sepp is executive vice president of the National Taxpayers Union.
It seems that in Washington words like loopholes, subsidies, and tax breaks have become so hackneyed they've lost any real, distinctive meaning. Yet, as these terms have grown more convoluted they've also become increasingly pervasive in the vocabularies of legislators and the president alike. As a result, many astute lawmakers have unwittingly ceded the power of semantics to their politically manipulative counterparts. For the sake of good public policy, particularly where taxes and energy intersect, it's unfortunate we've let them do so.
There's no lack of narrowly drawn tax favors in Washington, and the complexity of the U.S. tax code only seems to be making more room for them. Recently, New York Times reporter Jonathan Weisman highlighted how bureaucratic the system has become. He focused on just one tiny part of the law pertaining to "black liquor," which as part of a program to promote biofuels by providing a write-off to lumber companies for producing a sludge byproduct, even though it doesn't help improve emissions.
Weisman's article points out how attempts to delete tax breaks like these—seemingly unimportant except to a few entities—can still become bogged down in political infighting. Indeed, the 2010 healthcare law attempted to do away with the black liquor carve-out as a way to raise revenue. Black liquor, Weisman notes, generated $4 billion of tax savings in 2009, but even after it was cut advocates found ways to revive the tax reduction under other stipulations.
Far be it from my organization to call for raising taxes on any sector of our economy. Instead, the black liquor controversy simply serves to illuminate many other quandaries in fiscal and energy policy. For example, the very people calling for greater tax abatements for green technologies have been equally vocal in demanding the repeal of widely-available tax provisions that traditional energy producers happen to utilize. One of this crowd's favorite bills in Congress is the "Repeal Big Oil Tax Subsidies Act." Roughly 90 cents of every dollar raised by that legislation comes from denying a handful of major oil and gas companies two tax provisions that other industries commonly use, even as the proposal extends over a dozen separate tax breaks for alternative energy programs. Unbalanced approaches like these leave U.S. taxpayers in a lurch.
Simply put, lawmakers need to iron out the wrinkles in the law that make compliance expensive and distort the way American companies do business. A practical and all-around advantageous method for doing so is through the corporate tax rate. Today, the United States has the highest rate among OECD countries, which not only discourages domestic production, but also encourages businesses to migrate operations elsewhere. Reducing the rate from 35 percent, where it is now, to 25 percent or less would naturally obviate many carve-outs while honing American competitiveness. Such a plan, embodied in the House-passed Budget Resolution from earlier in this Congress, is not the only option. Lawmakers could go as far as replacing all income and payroll taxes with a single-rate consumption tax, through a bill like H.R. 25.
At the same time, lawmakers need to create greater transparency in the U.S. tax system. The difference between a "loophole" and an important provision is a fine line, and often interpreted by the eye of the beholder. Yet, quite often discussions about where this line should be drawn occur behind closed doors. It shouldn't be this way, especially since voters ultimately bear the costs of a complex tax system. As my organization's annual "Taxing Trend" study found, the 6 billion-plus hours Americans spent complying with federal personal and corporate tax law last year would be valued at nearly $200 billion, based on average employer costs for workers. Other out-of-pocket expenses for tax software, printer ink, etc., would add more than $30 billion to the total.
A more open process could involve not only Congress but other sectors, too. Back in 1997, the National Commission on Restructuring the IRS (a panel on which one of National Taxpayers Union's leaders served) recommended a quadrennial simplification process where volunteers from the private tax community would comb through the laws and make suggestions for streamlining the way they work. It's still a good idea, even if politicians were lukewarm to it 15 years ago.
Regrettably, the call for tax reform is all too often drowned out by the drumbeat of activists targeting political opponents or pushing arcane agendas. We can all agree there are many broken parts of the tax law that need repair or preferably replacement (sometimes with nothing). But first we should focus on fixing the overall system, rather than obsess over its individual maladies.
Particularly as the economy continues to struggle, Americans can't afford to let squabbling among special interests deter meaningful tax reform. Few would disagree that we need to rethink the entire tax system, which involves as its first principle broadening the base while lowering rates. Our policy should—at its core—seek to protect taxpayers from excessive burdens, allow businesses to thrive, and ultimately keep our economy healthy.