Tax Reformby Senator Orrin G. Hatch
Posted on 2013-03-11
HATCH. Mr. President, it is no secret that our Tax Code is in
dire need of reform. Although there are differences of opinion about
how best to fix our Tax Code, I do not think there is anyone in the
Chamber who would argue in favor of keeping our current code as it is.
As I have said before, I believe there is, for the first time in many years, real momentum to get something done on tax reform this year. The leaders of the tax-writing committees on both sides of the aisle have expressed a desire to move forward on tax reform, and there is real bipartisan support in both the House and the Senate.
This is going to be difficult, there is no question about it. It is going to be very hard to form and maintain a coalition in favor of a set of reforms that will simplify the current Tax Code and promote economic growth. It is going to take a lot of hard work and it is going to take people from both parties to get it done. But I think we can succeed.
However, last week it was disheartening to hear the chairperson of the Senate Budget Committee talk about the possibility of including instructions for tax reform in a budget reconciliation package. This news was discouraging for a number of reasons. First and foremost, reconciliation, by its very nature, is a partisan process. In the few instances in recent history when reconciliation resulted in legislation, there was bipartisan support at the outset. That simply is not the case with this proposal. If the Budget Committee goes this route, it will needlessly inject partisanship into a process that, if it is going to have any chance of success, must be bipartisan.
There is simply no way to pass a purely partisan tax reform package with the current makeup of Congress. Make no mistake, if the Senate majority pursues this course of action, it will poison the well for tax reform. It will make it all but impossible.
I would urge my colleagues on the Budget Committee to resist this temptation. If they really want to see tax reform succeed, they should let the tax-writing committees in both the House and Senate do their jobs.
Another concern I have is that the statements by the Budget Committee chairwoman make it unclear whether she is arguing in favor of tax reform or simply in favor of raising taxes. My suspicion is she is talking about the latter. It has become more and more common for my friends on the other side of the aisle to argue in favor of simply eliminating so-called tax loopholes in order to raise revenue and then calling the process ``tax reform.'' Indeed, the President used this very same tactic in the State of the Union. He stated his support for ``comprehensive tax reform,'' but he spoke almost exclusively about using the process to raise more revenue. Some of my colleagues have made similar arguments in the Senate.
That is not tax reform at all. Tax reform, as it has been traditionally proposed and understood, is a process of eliminating certain preferences in order to broaden the tax base and lower the rates. This is how you simplify the Tax Code. This is how you make it more efficient and fair. Most importantly, it is how you make the Tax Code more conducive to economic growth.
If you are eliminating select deductions and preferences only to pocket the revenue for future spending, you are not reforming the Tax Code, you are simply raising taxes. If the Budget Committee is about to report a budget which includes restrictions for tax reform, I can't help but assume the process will be more about raising revenues than it will be about actually fixing our broken tax system.
Once again, if this is the case, the Budget Committee would be injecting partisanship into what has up to now been mostly a bipartisan effort. At the same time, they would be perpetuating the myth that our Tax Code is full of so-called loopholes which benefit only the rich. I have spoken about this at length on the Senate floor, but the message bears repeating.
The term we hear most often to describe deductions and preferences in [[Page S1277]] the Tax Code is ``tax expenditure,'' which implies that by allowing people to keep more of their money, the government is somehow engaging in spending. Indeed, the President has even gone so far as to refer to deductions and preferences, which reduce an individual's or business's tax burden, as ``spending in the tax code.'' As I said before, when many of my Democratic friends talk about tax reform, they are usually talking about eliminating these provisions in order to raise revenue so they can spend it. Far too often they refer to these provisions as loopholes. For example, the Budget Committee chairwoman was quoted last week as saying her committee is looking at closing loopholes as a means of reducing the deficit.
Let me make one thing clear: Describing tax expenditures as loopholes is simply and deliberately inaccurate. A loophole is something Congress did not intend; and, in general, we would eliminate loopholes once we learned they were being improperly exploited.
Tax expenditures, by contrast, are placed by Congress into the Tax Code deliberately. For example, the largest tax expenditure is the exclusion for employer-provided health insurance and benefits. Do we want to do away with that? Another one of the largest tax expenditures is the home mortgage interest deduction. Some would like to do away with that and millions would not--especially all the home builders around the country. Whether these expenditures benefit someone in the middle class or one of the so-called rich, they are not loopholes. These are not tax schemes some lawyer or accountant concocted to help his clients game that system. These are broad-based tax incentives used by many Americans.
Favorable tax treatment of tuition expenses could be labeled spending through the Tax Code or a ``loophole,'' but you don't hear many people using those terms to explain them. Rather, my friends on the other side of the aisle use the term ``loophole'' to describe things they do not like and ``investment'' to describe things they do like. This is about picking winners and losers and not about tax reform.
Even if you disagree with a particular tax expenditure, it is simply dishonest to refer to it as a loophole. An honest debate requires recognition that all of these tax expenditures were designed by Congress with economic or social goals in mind and are not tax escapes created by accident or sneaky abuses of the Tax Code.
Furthermore, if we are talking about eliminating tax expenditures, we need to be clear about who benefits from them. If you look at the largest list of tax expenditures, you will find the ones most often cited by my colleagues on the other side, such as bonus depreciation on corporate jets or tax breaks for oil companies, are not among them.
What you will find is a list of deductions which disproportionately benefit the middle class. This being the case, if my colleagues are serious about significantly reducing the deficit by eliminating deductions and so-called loopholes, they will necessarily be talking about raising taxes on the middle class. Indeed, if they only focus on those provisions which benefit the so-called rich, they will not be able to raise enough revenue to make a serious dent in the deficit.
For example, let's take a look at the mortgage interest deduction. According to the Joint Committee on Taxation, only 35 percent of the benefit of the mortgage interest deduction goes to taxpayers with incomes over $200,000 per year. The remaining 65 percent goes to taxpayers who make less than $200,000. By a ratio of almost 2 to 1, the mortgage interest deduction benefits the middle class, not the so- called rich.
We may also look at the earned income tax credit, another large tax expenditure. This is another fully refundable tax credit, meaning taxpayers can receive it whether they pay income taxes or not. High- income earners receive no benefits from the earned income tax credit.
The story is the same with the child tax credit, which is limited to lower and middle-income earners. None of it goes to taxpayers with higher incomes. Likewise, all education credits go to taxpayers making less than $200,000 a year.
The list goes on and on. Deductions for real property taxes, medical expenses, childcare, and student loan interest, all of them predominantly, if not exclusively, benefit people making less than $200,000 a year.
Benefits from some other large tax expenditures are distributed almost proportionately between higher and middle-income earners. One such provision is the State and local income and sales tax deduction.
According to the Joint Committee on Taxation data, 55 percent of the benefit of this deduction goes to taxpayers making more than $200,000 a year, and 45 percent of the benefit goes to people making less than $200,000 a year. This expenditure accounts for about one-half of the revenue loss attributable to itemized deductions. Since the benefits are slightly more in favor of those with higher incomes, it would likely be a target for a ``tax reform'' exercise designed to raise revenue. However, much of the burden of limiting or eliminating this deduction would still fall on the middle class.
It is also interesting to note that this past December the New York Times editorial page, which is usually very much in sync with the philosophy of the Democratic Party, recommended caution when considering limits to this particular deduction. Yet it is one of the largest tax expenditures in the country.
I ask unanimous consent to have printed in the Record the New York Times editorial from December 6, 2012, entitled ``Keep the State Tax Deduction.'' [From the New York Times, Dec. 6, 2012] Keep the State Tax Deduction As they continue to wrangle over the year-end fiscal deadline, both Democrats and Republicans are considering caps on federal income-tax deductions.
That could be very bad news for residents of New York, New Jersey and other states and cities that rely heavily on their own income taxes. Such a cap would reduce the value of the deduction for state and local income taxes, which has been part of the federal tax code for a century (though the deduction has been diluted by the alternative minimum tax). That could substantially reduce middle-class disposable incomes in high-tax states, which, in turn, would put pressure on those states to cut taxes and the services they have long chosen to provide. (A cap would also affect property and sales taxes, though those are spread around more evenly among all the states.) The theory behind the deduction was that the amount paid to states in taxes is not really part of an individual's disposable income, because it is obligatory and, therefore, should not be taxed twice. Over time, the deduction has become the equivalent of a subsidy from the federal government to states that believe in a strong and active government. That may infuriate conservatives in low-tax states like Texas, who hate subsidizing states with different views of government's role, but it's actually a good thing for the country.
The deduction is Washington's way of supporting states that support their most vulnerable citizens and neediest cities. The seven states that account for 90 percent of state and local tax deductions (including sales and property taxes)-- New York, New Jersey, California, Pennsylvania, Maryland, Illinois and Massachusetts--generally do a better job of providing for the health and welfare of their citizens, and are more willing to pay for institutions that are good for society as a whole.
Rapid-transit systems in states like New York and Massachusetts, subsidized with tax dollars, save energy and improve the environment. Few cities can afford to operate their own universities, but the City University of New York, also subsidized with tax dollars, is an enormously valuable institution with national benefits. Public hospital systems and generous Medicaid programs have improved and extended the lives of tens of millions of low-income people.
Texas is proud not to have an income tax, but it also has by far the highest percentage of uninsured people in the country. It ranks last in prenatal care as well and in overall federal assessment of health quality.
In their fiscal-cliff offer, Republicans have proposed raising $800 billion by capping deductions for the wealthy, though their proposal would inevitably affect the middle class in expensive states like New York and California. President Obama would prefer to raise tax rates, but he has also proposed deduction limits that would affect states that have chosen to impose higher income taxes. Governors, mayors and representatives of those states need to make their voices heard in support of that choice.
Once again, when my friends on the other side of the aisle talk about eliminating so-called loopholes for the sole purpose of raising revenue, they are either talking about raising taxes on the middle class or they are proposing changes which will have no meaningful impact on the deficit at all. If the goal is to construct political talking points and raise relatively significant [[Page S1278]] amounts of revenue by going after politically convenient targets--jet owners, oil companies, private equity firms, and the like--you may do this by eliminating a handful of so-called loopholes.
This isn't the stated goal of the President, nor is it what my colleagues on the Budget Committee talk about when they say they want to pursue ``tax reform'' through reconciliation. No, instead they talk about reducing deficits, debt, and attaining fiscal sustainability. They cannot do this by focusing efforts on tax provisions which only benefit the wealthy. The money simply isn't there. If we are not going to cut spending, and if our deficit reduction efforts are focused only on eliminating so-called tax loopholes, then the middle class happens to be the target.
We need a different approach. We need tax reform which focuses on eliminating preferences in the Tax Code--not for the purpose of raising taxes but for lowering the rates and encouraging economic growth. Unlike the idea of tax reform advanced by some of my friends on the other side, this will benefit the middle class.
This is what tax reform is all about. Anyone talking about raising taxes or closing loopholes for the sole purpose of generating revenue is not talking about tax reform. For these reasons, I hope the Budget Committee will go a different route. I hope they will let the bipartisan tax reform efforts underway in both the House and Senate run their course.
If they don't, if they hijack the process in order to once again raise taxes on the American people and to vilify Republicans as being the ``party of the rich,'' we will not see tax reform happen this year or, quite likely, any year in the near future.
Our Nation is facing a number of challenges. In addition to mounting debts and deficits, our economic recovery remains on a slow and tenuous path. We need people who are willing to make difficult choices in order to solve these problems. This will mean structural reforms to our entitlement programs, which are the main drivers of our debts. Once again, that will mean real, meaningful changes to our Tax Code, which continues to be an obstacle to sustainable economic growth.
As I stated, I do believe there are people on both sides of the aisle who recognize these needs, particularly when it comes to tax reform. Sadly, there are also those who would rather campaign on these problems, attacking anyone who proposes real solutions while offering only political talking points in return. That is not what the American people deserve.
Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.