By Tom Curry National affairs writer
msnbc.com
updated 5/12/2011 9:58:01 AM ET 2011-05-12T13:58:01

If tax breaks were repealed, the Treasury would get more revenue and the deficit would be smaller.

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It's a statement that seems to be both obvious and true -- and one that many members of Congress would endorse. But which tax breaks ought to be scrapped, yours, mine, or those of someone else?

The debate over simplifying the tax code is brewing in Washington as lawmakers seek answers to the nation's fiscal ills.  But Thursday's Senate Finance Committee hearing on ending tax breaks for oil and gas companies isn’t really part of that broader long-term effort to shrink budget deficits and the debt by ending tax breaks.  It's more like business as usual.

Simplification crusade may have to wait
The tax simplification crusade will likely have to wait until next year or beyond to get closer to its goal. “There’s nothing coming out of the major actors right now,” said former Treasury Department official Eric Toder, who is co-director of the Urban Institute-Brookings Institution Tax Policy Center.

But that doesn't mean there hasn't been plenty of talk about it.  Last December's report from President Barack Obama’s fiscal commission called for a drastic cut in the number of tax breaks: "These tax earmarks — amounting to $1.1 trillion a year of spending in the tax code — not only increase the deficit, but cause tax rates to be too high."

And both Obama and House Budget Committee chairman Paul Ryan have voiced support for tax simplification. Obama specifically cites it as one path to deficit reduction: “It’s important that we look at our tax code and find a way to work together to not only simplify and make the tax system fairer, but also that we use it as a tool to help us achieve our deficit targets.”

Ryan has emphasized the fairness question: “The code is patently unfair, as many of the deductions and preferences in the system — which serve to narrow the tax base — are mainly used by a relatively small class of mostly higher-income individuals.”

Video: Big Oil Subsidies (on this page)

Budget deficit hawks are waiting to see if the bipartisan Gang of Six senators will devise a deficit-shrinking plan and whether tax simplification will be part of their plan.  But Thursday’s Finance Committee hearing isn't likely to provide many hints. 

Instead, what is happening is a familiar Capitol Hill ritual: grilling the heads of Chevron, Exxon Mobil and other energy companies, demanding that they explain why their firms and shareholders enjoy tax preferences at a time when oil prices are high and profits are robust.

Finance Committee Chairman Sen. Max Baucus, D- Mont., has already called for three steps:

  • Eliminating the domestic manufacturing deduction for oil and gas firms
  • Reducing the foreign tax credit for royalty payments that energy firms make to foreign governments
  • Imposing a tax on certain oil and gas leases in the Gulf of Mexico

Baucus’s first proposal parallels one made by Obama in his fiscal year 2012 budget plan.

Unlike Baucus, Obama has also called for eliminating tax preferences for coal, which would raise about $136 million in FY2012.

More incentives for alternative energy
Baucus is also calling for using the tax code to create incentives for alternative energy fueling stations and other steps to spur the use of non-gasoline powered vehicles.

Tax simplification isn't the point. Baucus's proposals are part of the time-honored tradition of using the tax code to encourage some activities and industries and not others. He said last month his effort is aimed at “reducing dependence on foreign oil” and “encouraging increased production of cleaner and more affordable domestically-produced fuel by making it easier for manufacturers to produce and for consumers to purchase.”

The tax code already includes tax breaks for energy efficiency and for non-oil and gas sources such as biodiesel. Those breaks will be worth about $10 billion this year, according to the Office of Management and Budget.

In his budget proposal Obama called for repealing eight specific tax preferences for oil and gas companies. The Office of Management and Budget estimated that eliminating all eight would raise nearly $3.5 billion in fiscal year 2012.

Also this week three Democratic senators, Bob Menendez of New Jersey, Claire McCaskill of Missouri, and Sherrod Brown of Ohio, proposed a bill that would end most of the oil and gas tax preferences which Obama proposed to kill in his budget.

Thursday’s focus on energy tax breaks may obscure the fact that those breaks are comparatively small when measured against the tax breaks for individuals.

The nonpartisan staff of the Joint Committee on Taxation said last month, “Except for the accelerated depreciation of equipment and then not always, all of the largest corporate tax expenditures are smaller than the smallest of the top ten individual tax expenditures.”

The big tax breaks go to individuals and families
The two biggest tax breaks are the tax-free status of employer provided health insurance (worth nearly $120 billion to individuals and families this year) and the deduction for home mortgage interest (worth $94 billion this year).

To do the kind of revenue raising and deficit cutting that the president’s fiscal commission proposed, Obama and the Congress would need to go far beyond oil and gas tax breaks.

A new proposal offered by Harvard University economist Martin Feldstein, Daniel Feenberg of the National Bureau of Economic Research, and Maya MacGuineas of the New America Foundation would limit each taxpayer’s tax breaks to 2 percent of their income.

Their proposal would reduce the 2011 deficit by $278 billion, achieving nearly 80 times as much deficit reduction as Obama’s proposal to eliminate oil and gas tax breaks.

Getting too specific about tax breaks can defeat the effort to raise revenues through tax simplification. Feldstein, Feenberg, and MacGuineas say paring down the deduction for home mortgage interest or for state income taxes, for instance, might lead taxpayers to “complain that such a targeted approach is unfair in focusing on just one or two tax expenditures.”

Their plan would raise revenue without “without unfairly burdening taxpayers who benefit from a particular deduction,” they say, and thus it would avoid the intense battles among special interests that make tax reform a nightmare.

While former Treasury official Toder does not foresee any significant effort this year to enact the kind of far-reaching reform that Bowles-Simpson or Feldstein, Feenberg, and MacGuineas propose, there will be lots of discussion of such ideas. He notes, “Previous tax reform efforts were all preceded by a number of years of talk. So talk is not irrelevant.”

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