Opponents of Reform Lean on Illogical Justification for Tax Breaks
A commonly held perspective – that special tax breaks should be treated like any other form of state spending during our biennial budget process -- has recently come under an interesting line of attack by some policymakers. While their claims make for good sound bites, they simply don’t stand up to basic scrutiny.
Here in Washington state, lawmakers and advocates who oppose greater transparency for special tax breaks have taken to repeating statements made by prominent conservative commentators like Grover Norquist of Americans for Tax Reform. (Norquist argues in favor of completely dismantling fundamental national structures like Medicare and Social Security.)
As we’ve written previously, most economists and policy experts agree that narrow tax breaks or “tax expenditures” share many of the same attributes as direct spending on public services and should be treated similarly during the budget process. Of that position, Norquist recently wrote,
“This is the theory that if the government fails to take a dollar from you it has in fact given you the dollar. In Obama’s world he owns all your income and if through a tax credit or deduction he deigns to let you keep some he has just ‘spent’ that money.”(1)
This argument may have a certain emotional appeal, but it fails as a framework for rational tax policy analysis. For one thing, this perspective fails to recognize the inherent connection between the taxes we all pay and the services we receive in return. Few would seriously argue that government in fact “owns all of your income.” However, through our democratic systems and structures we’ve decided to provide a certain level of public services – and every time we offer a special tax break to some, others must bear that cost through higher taxes, fewer public services, or both.
Economist Josh Barro of the conservative Manhattan Institute provides the definitive repudiation of Norquist’s argument. In a recent article in the National Review, Barro notes that denying the connection between special tax breaks and the budget process leads to “perverse policy conclusions.” According to Barro,
“If you hold that tax expenditures aren’t expenditures, how you structure these programs matter a lot when measuring the government: ‘government spending’ is lower if you turn the EITC [Earned Income Tax Credit] into a payroll tax exclusion, or Cash for Clunkers into a tax credit. But if two policies have identical economic effects, shouldn’t we try to measure them in the same way? This is what the ‘tax expenditure’ concept does: it allows us to measure economically identical government programs in comparable ways, whether they operate through the tax code or not.”(2)
In other words, we carry out public policy goals in a variety of ways, some via direct state spending programs, others through our tax code. Opponents of reform want to continue excluding policies carried out via special tax breaks from the definition of state spending. Now more than ever, we simply cannot afford to maintain such a narrow and distorted view of our state government and public spending priorities.
The failure to properly account for special tax breaks in the state budget process has led to an unbalanced response to the recession. While our vital public health, education, and safety services have weathered cuts totaling more than $5 billion in the last two years, expenditures on the hundreds of special tax breaks have hardly been touched.
Our ability to recover from the Great Recession depends upon policymakers enacting holistic and far-sighted reforms to our entire state budget process – including the billions of dollars we spend each year on narrow tax breaks.
Our recent policy brief, “Every Dollar Counts: Why It’s Time for Tax Expenditure Reform,” provides more analysis on how we can reform our tax break system.
Also, check out our new Framework for Prosperity site. This tool provides a common sense, vision-based approach that includes measuring our progress toward key public priorities and securing our fiscal future through long-term reforms.
1. Grover Norquist, "Obama's Numbers Don't Add Up," FoxNews.com, April 13, 2011, http://www.foxnews.com/opinion/2011/04/13/obamas-numbers-dont-add/.
2. Josh Barro, "Yes, Virginia, There is Such a Thing As a Tax Expenditure," National Review Online, November 11, 2010, http://www.nationalreview.com/agenda/253153/yes-virginia-there-such-thing-tax-expenditure-josh-barro.