Infographic: Tax Breaks vs. Budget Cuts via Romie Sidabras

Infographic: Tax Breaks vs. Budget Cuts

By Donna Cooper | February 22, 2011

House leaders are unfortunately restricting their proposed budget cuts for the remainder of fiscal year 2011 to nonsecurity discretionary spending in an attempt to tame a $1.3 trillion deficit. This approach is especially shortsighted since the Federal Treasury loses twice as much revenue due to tax breaks than Congress appropriates on all nonsecurity discretionary spending.

The chart below compares the 10 safety-net programs slated for deep cuts with the cost of the tax breaks that should also be considered for reduction or elimination to bring the budget into balance. The column on the left is a list of safety-net programs that have already been targets of the House leadership’s budget ax. The column on the right is the cost to specified tax breaks (see bottom of page for sources).

Most Americans would be surprised to learn that tax breaks are not on the table during any budget negotiations. In fact, Congress has the Congressional Budget Office prepare an official spending estimate for the cost of all programs or their expansions. Meanwhile, Congress enacts and continues tax breaks without any requirement that the cost of tax breaks be calculated and shared with members before a vote.

That’s why, over the last 16 years, the cost to the Treasury of the mortgage interest tax deduction, for example, doubled from $48 billion in 1995 to nearly $100 billion this yearand no one made a peep about getting control of this loss in revenue. The stunning growth in this tax break is unchecked and unquestioned.

This tax break is also increasingly benefiting individuals who don’t need any federal incentives to purchase a home. In 2011 the mortgage interest deduction will help families who purchase a vacation home avoid taxes to the tune of $800 million. Meanwhile, the House Budget Committee chairman’s 2011 budget bill included $730 million in cuts to housing programs for the elderly and disabled.

There are many other examples where the cost of tax breaks are skyrocketing and disproportionately benefiting companies and people who don’t need them (see chart above):

• Congress should rein in the $4.6 billion in tax breaks given to companies who move jobs offshore instead of making cuts to the $4 billion in job-training programs.
• Oil companies get more than $2 billion in tax write-offs for drilling expenses yet Congress is considering cutting the Low Income Home Energy Assistance Program, the $2 billion federal program that helps poor families pay their winter heating bills.
• Large biofuels companies, such as Archer Daniels Midland, benefit from the ethanol tax break that now costs nearly $5 billion a year. And oil companies such as ExxonMobil benefit from more than $9 billion in tax breaks for oil exploration.

Some tax breaks make sense. Those that stimulate economic activity that otherwise wouldn’t happen without the tax incentive may be worth the lost revenue, especially if that economic activity creates American jobs and provides assistance in sectors of the economy that show potential for growth.

That’s exactly what the Research and Development Tax Incentives or the Renewable Energy Tax Credits provide. Income tax breaks that help keep working families afloat, such as the Earned Income Tax Credit, use the tax code effectively to stabilize the economy.

It’s regrettable that the congressional budget process doesn’t permit a robust debate about the choices we can and must make to bring the budget into balance. The Center for American Progress is thus pushing for a process where tax breaks are “scored” so members of Congress know and consider the cost of tax breaks as part of the annual congressional process to pass a budget.

A transparent budget process approach should be instituted now given the enormity of the budget challenge. It makes no sense to eviscerate safety-net supports when billions in unnecessary tax entitlements can be cut to preserve these important and socially responsible federal expenditures. Congress must face up to the cold hard fact that it’s time to make the tough choice to end tax entitlements—such as the one for “NASCAR racing facilities”—so federal funding for critical items such as child-nutrition programs are spared.

Donna Cooper is a Senior Fellow at American Progress.

Sources for tax breaks

Row 1: Figure represents half of the estimated $23 billion cost of weakening the estate tax for 2011 and 2012. See: Gillian Brunet and Chuck Marr, “Unpacking the Tax Cut-Unemployment Compromise,” Center on Budget and Policy Priorities, December 10, 2010, available at http://www.cbpp.org/cms/index.cfm?fa=view&id=3342.

Row 2: Figure represents 1 percent of the fiscal year 2011 tax expenditure estimate for the mortgage interest deduction, over 10 years. The vacation home deduction accounts for at least one percent of the tax expenditure cost. See: Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2012 (Executive Office of the President, 2011), table 17-1; Congressional Budget Office, “Budget Options” (2000), REV-02.

Row 3 (now re: estate planning): General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals (Department of Treasury, 2011).

Row 4 (now re: itemized deduction limit): General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals (Department of Treasury, 2010).

Row 5: Joint Committee on Taxation, Estimated Budget Effects of the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” JCX-54-10, December 10, 2010 (subpart F active financing exception).

Row 6: General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals (Department of Treasury, 2011).

Row 7: Joint Committee on Taxation, Estimated Budget Effects of the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” JCX-54-10, December 10, 2010 (half of total cost of two-year extension).

Row 8: General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals (Department of Treasury, 2011).

Row 9: General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals (Department of Treasury, 2011) (10-year cost).

Row 10: Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2012, (Executive Office of the President, 2011), table 17-1 (expensing of multiperiod timber growing costs and capital gains treatment of certain timber income).

Row 11: Joint Committee on Taxation, Estimated Budget Effects of the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” JCX-54-10, December 10, 2010 (half of total cost of recent two-year extension).

See also:

•  Government Spending Undercover by Lily Batchelder and Eric Toder