Editor’s note: This op-ed is by Tom Pelham, Finance commissioner in the Dean administration, Tax commissioner in the Douglas administration, state representative serving on the Appropriations Committee, now a founding member of Campaign for Vermont.
Last month, the Congressional Budget Office (CBO) updated its view of the federal fiscal mess and the economy. (Click here for the report.)
A key passage in the report’s summary introduction reads:
“Under Current Law, Federal Debt Will Stay at Historically High Levels Relative to GDP
The federal budget deficit, which shrank as a percentage of GDP for the third year in a row in 2012, will fall again in 2013, if current laws remain the same. At an estimated $845 billion, the 2013 imbalance would be the first deficit in five years below $1 trillion; and at 5.3 percent of GDP, it would be only about half as large, relative to the size of the economy, as the deficit was in 2009. Nevertheless, if the laws that govern taxes and spending do not change, federal debt held by the public will reach 76 percent of GDP by the end of this fiscal year, the largest percentage since 1950.”
It seems broadly accepted that this debt crisis, now accumulated at more than $16.5 trillion, is our responsibility and ours to fix. Passing this burden along to those still in diapers or just completing high school has its karmic consequences. They’d have a right to condemn.
Some small remedial steps have been made toward amends. We’ve raised taxes on upper income folks and, though chaotically, cut $85 billion from the federal budget through sequestration. This $85 billion is dwarfed however relative to the $85 billion the Federal Reserve Bank is printing each month to buy government-backed debt obligations to keep interest rates artificially low in hopes of stimulating a still anemic economy. When the Fed unwinds this position, higher interest rates are expected to ripple through our economy, suppressing asset values.
Possibly, the Joint Committee’s document could be used as a basis for discussion as to the “Vermont Way” to restructure these tax expenditures to help with either tax reform or deficit reduction.
Another small step, hopefully to the good, is that both branches of Congress, for the first time in four years, have passed budgets. Now, let’s hope they embark on a sincere effort to find agreement on the revenue and spending choices before them. If they can settle these structural matters, it’s likely that those hoarding cash now squirreled away in corporate balance sheets will judge it’s “safe to come in the water” and invest that cash in the American economy, allowing Fed Chairman Bernanke to abate his stimulus efforts in favor of real economic investment and growth.
One major choice for certain will be what to do about federal “tax expenditures.” These are provisions in the tax code that allow corporate and individual taxpayers exemptions from underlying tax requirements. For example, individuals can shield income from taxes by making charitable contributions and corporations can shield income earned in foreign countries by setting up subsidiaries in such countries.
Each year, the Congressional Joint Committee on Taxation publishes a profile of “tax expenditures” covering a five-year period. Here is the committee’s recent report for the period 2012-2017. It’s a relatively short and digestible report with 30 pages of descriptive narrative and 18 pages of tables profiling the value of each expenditure and the distribution by income class of some of the major expenditures. Generally, proclamations from congressional leaders and the president indicate that Republicans would alter these expenditures to reform and simplify federal tax codes and reduce rates while Democrats would alter them to harvest revenues to support spending priorities. However, neither the House nor Senate budget proposals contain specific details as to which of these “tax expenditures” would be eliminated or constrained. The president has yet to issue his budget proposal for fiscal 2014.
For fiscal year 2015, current law allows 198 major types of “tax expenditures” with numerous subparts. Over all, they are valued at $1,254 trillion, with $1,127 trillion projected for personal income tax filers and $127.3 trillion assigned to corporate income tax filers. Additionally, there are 52 corporate and 55 personal income “tax expenditures” with no specific valuation as the Joint Committee did not value expenditures believed to be less than $50 million annually.
VTDigger is fortunate to have many bright and engaged readers, contributors and commenters from across the political spectrum. Possibly, the Joint Committee’s document could be used as a basis for discussion as to the “Vermont Way” to restructure these tax expenditures to help with either tax reform or deficit reduction. Keep in mind that each $100 billion in annual savings amounts to roughly $1 trillion in tax reform or deficit reduction over the CBO’s 10-year horizon. I focused on fiscal 2015 above as fiscal 2014 begins this coming October, a somewhat unreasonable date by which to have changes in place. Further, possibly VTDigger could forward this report to Sens. Leahy and Sanders and Congressman Welch and ask each to specify for VTDigger readers which “tax expenditures” profiled in their staff’s Joint Committee’s Report they support for elimination or constraint.
