There’s only one thing you can do in Washington these days that would be worse than tweeting your underpants. And that would be to “friend” a tax loophole. Loopholes, just to be clear, are a subset of the fiscal tool policy wonks call tax expenditures—that is, tax breaks intended to aid some favored group or promote some socially desirable behavior. Tax expenditures, naturally, cost the Treasury revenue and widen the deficit. If it’s in a good cause, fine. If not, it’s a loophole.
In the war against demon deficit, whacking loopholes is a sanctified bi-partisan pastime. The L-word figures centrally in every tax reform plan from the President’s Fiscal Commission to Republican Congressman Paul Ryan’s Road Map for America’s Future. Tim Pawlenty’s ultra-Republican economic manifesto last week took only the most recent swipe at a tax code “littered with special interest handouts, carve-outs, subsidies, and loopholes that should be eliminated.” Loophole-ectomy is right there in President Obama’s platform, too: "Get rid of the loopholes,” he said in his State of the Union address. “Level the playing field.”
So what if you actually did try to get rid of them? You’d have lots of options, for starters: The President’s 2012 budget lists 173 tax expenditures, ranging from monsters like the exclusion of employer paid premiums for health coverage, which will cost the Treasury $1 trillion between 2012 and 2016, to the modest tax credit for building energy-efficient new homes, a bargain at just $10 million.
So I asked CBS MoneyWatch.com reporter Judy Feldman to canvass tax policy experts for a top-five hit list of expendable tax expenditures, starting with the most useless, unfair, corrupt or otherwise loopy. Warning: To read on is to be reminded, once again, how twisted our tax code is.
1. GaGa over Capital Gains. When most artists sell work they’ve created, they pay tax at ordinary income rates of up to 35%. A songwriter who sells a catalog of songs, however, can report that income as a capital gain, which means a rate of no more than 15%. Why songwriters and not, say, authors, sculptors, poets or screenwriters? Perhaps because they’re not represented by the Nashville Songwriters Association International, the lobby that boasted of writing the 2006 legislation and that apparently had a good relationship with Tennessee Senator and former majority leader Bill Frist. Estimated price tag: $14 million over five years
2. The Masters of the Universe Loophole. Nashville honey Taylor Swift and Wall Street hedgie John Paulson may not have much in common, but the tax code doesn’t see it that way. Like songwriters, private equity and hedge fund managers get to treat their income as capital gains and pay the 15% gains rate. Talk about perverse consequences: Paulson, who earned between $3 billion and $4 billion in 2008, paid taxes on much of those earnings at a lower rate than his limo driver and maid. The cost to taxpayers: $9.7 billion between 2012 and 2016, according to the CBO. The cost in diminished credibility for Uncle Sam caught giving another handout to Wall Street: priceless.
3. Fast Writedowns for Fast Cars. The tax code allows businesses to depreciate the cost of buildings and equipment over time--an acknowledgment that things wear out. For nonresidential property, the write-off period is 39 years, typically; for improvements like roads and fences, it’s 15 years. Not, however, if the property is for a “motorsports entertainment complex.” In that case, the writedown period shortens to seven years. Why do tracks on the NASCAR circuit need a tax break? Blogger “massacio” at Firedoglake.com points out that International Speedway Corporation, which owns several tracks and is controlled by the France Family, was expanding at the time the loophole was extended last year, although its projects were well along and almost certainly would have happened without the extension. “The loophole did not create a single job [at International Speedway],” he concludes. “The extension is a pure gift to the company.” (The Frances also control NASCAR, the sport’s governing body.) Cost: $40 million in 2011.