Will Tax Reform Mean the End of These 10 Tax Breaks?
Policy + Politics

Will Tax Reform Mean the End of These 10 Tax Breaks?


The House on Thursday voted to repeal the estate tax on multimillion-dollar estates and farms, but don’t assume this is a harbinger of major tax reform this year. 

House Speaker John Boehner and other Republicans hailed the vote as a boon to family farmers, ranchers and small business owners who want to pass along the fruits of their hard work to their children and families. But Democrats and the Whitehouse dismissed the vote as a needless giveaway to several thousand of the wealthiest families, and the bill faces certain defeat in the Senate or a presidential veto. 

Related: Americans Spend More on Taxes Than on Food, Clothing and Shelter

While nearly 60 percent of all Americans favor major tax reform, according to a recent Pew Research Center  survey, odds are against Congress approving major tax reform this year, as the 2016 presidential campaign begins to heat up and partisan positions begin to harden.

“I can give you a scenario where it would happen, but it seems like time is running out,” said William G. Gale, a tax-policy expert at the Brookings Institution. “It seems like time is running out. They sort of have to do something by August or September, then they go home for the holidays. And then it’s an election year.”

The three announced Republican candidates for president already are spelling out their stands on the issue, according to Roll Call: Sen. Ted Cruz of Texas favors outright abolishing the IRS and replacing all current taxes with a flat tax. Sen. Marco Rubio of Florida favors eliminating most taxes on capital gains, dividends and estates. And Sen. Rand Paul of Kentucky favors a temporary reduction in the repatriation tax on overseas earnings as a way of generating revenue to underwrite federal highway and transportation projects. 

“There are a lot of good suggestions out there, we’re listening to a lot of them, and we always look for ways to improve our plan,” Rubio said recently. “But our hope is that we can arrive at a consensus in America about what a 21st Century tax code looks like.”

Related: The 10 Worst States For Paying Taxes

Many others, including Sen. Orrin Hatch (R-UT), chair of the Senate Finance Committee, and Rep. Paul Ryan (R-WI), chair of the House Ways and Means Committee, have very different ideas of what a comprehensive tax overhaul ought to look like. The last time Congress agreed on major tax legislation was in 1986. Many say there is only feint hope Congress can reach a consensus this year to streamline and simplify the tax code and weed out costly tax breaks and loopholes. 

“We want to lower rates across the board for individuals, families, everybody – like ’86,” Ryan told reporters earlier this year. “We have a president who doesn’t like that, so we’re trying to figure out: Is there a way to get part of that now, and in a way that helps make sure we get the second part later?” 

Clearly, one of the biggest challenges will be to overcome intense lobbying efforts by businesses, institutions and other special interest groups to rewrite or eliminate scores of tax breaks embedded in the federal tax code that  are worth more than $1.3 trillion, according to the Joint Committee on Taxation.

“Everybody wants tax reform, but the business community is fractured in its interests, and they can’t get behind a particular proposal,” said Gale of Brookings. “So for example, if you broaden the base and reduce rates, the companies that have a lot of deductions and would lose them are against it and the companies that don’t are for it.”

Related: How Tax Reform Could Help Save U.S. Infrastructure

The roughly 200 so-called tax expenditures are a huge drain on the U.S. treasury because they represent potential tax revenues that will never be collected.

By far the biggest individual break is for employer-paid health care, health insurance and long-term care insurance, none of which is counted as taxable income. That provision alone cost the government $143 billion in the last fiscal year, and is estimated to cost $150.6 billion this year.

The provisions taxing dividends and capital gains at lower rates than ordinary income will deny the Treasury an estimated $120.3 billion in the current fiscal year. The controversial mortgage-interest deduction will cost nearly $75 billion this fiscal year, while the accompanying deduction for local property-tax payments will cost another $34 billion.

Most of these loopholes and tax breaks benefit individual taxpayers who paid $4.8 trillion in taxes in 2014—more than what they spent on food, clothing and shelter. Adding to their tax burden could have serious consequences. Since consumer purchasing power is the engine of the U.S. economy, reducing their discretionary income could tilt the balance of against too heavy a tax load.

Related: 11 New Tax Laws House Republicans Want to Pass Now​

Here are the ten largest tax breaks in the federal tax code, according to Pew and the Joint Committee on Taxation:

Biggest Federal Tax Breaks

Pew analysts and others caution that it’s risky to view these costly tax breaks or “tax expenditures” in a vacuum, and that doing away some of these special-purpose breaks could have unanticipated consequences while not necessarily sweetening the Treasury’s revenue pot.

“Simply repealing, say, the exclusion for employer-paid health benefits wouldn’t necessarily automatically add $150 billion to federal revenues, since taxpayers might be able to take advantage of other breaks hidden in the tax code,” the Pew report stated. “The Joint Committee report does not try to predict how taxpayers’ behavior might change if certain provisions were cut back or repealed.”

For instance, repealing the tax exemption of employer-provided health insurance could trigger a stampede of Americans seeking replacement insurance to the exchanges created by the Affordable Care Act, with corresponding increases in state and government operating costs and subsidies.

Others, including economists at the conservative Mercatus Center at George Mason University, have argued that eliminating the tax exemption would be a good thing. That’s because it would allow employers to increase employee pay by a comparable amount –   $12,000 or more annually – and enable employees to shop for health insurance better tailored to their needs.

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