Finding the money in the federal budget to pay for the recovery from hurricanes Katrina and Rita is now the fixation of members of Congress and of critics of fiscal laxness in Washington.
There’s an easy target for the critics: “pork barrel” spending projects such as $223 million to build the now-infamous bridge in Alaska to connect Ketchikan to Gravina Island, with a population of only 50 people. Congress OK’d the bridge as part of a $253 billion highway construction bill in July.
But Comptroller General David Walker, who heads the federal government’s fiscal watchdog agency, the General Accountability Office (GAO), is telling Congress and the American people there’s much bigger money going unavailable for critical spending needs.
Tax breaks cause nearly $730 billion in revenue losses every year, the GAO said in a
To put that number in perspective, $730 billion is just slightly less than what the federal government spent in 2004 on all military outlays and on the Medicare health insurance program for the elderly combined.
Tax breaks add up
Looked at another way, $730 billion is about equal to the total amount of Social Security and Medicare taxes paid by workers and employers in 2004.
In Washington lingo, these tax breaks are called “tax expenditures.” They “grant special tax relief for certain kinds of behavior by taxpayers or for taxpayers in special circumstances,” according to the new GAO report released Friday.
The 146 tax breaks now enshrined in federal law include everything from the deductibility of home mortgage interest ($76 billion in foregone revenue this year) to the tax-free status of reimbursed employee parking expenses ($2.7 billion in foregone revenue).
When you get one of these tax breaks, your effective tax rate — the ratio of the taxes you pay to your total income — is cut. You save money, but that means there's less revenue flowing into the Treasury to pay for aircraft carriers, meat inspection, Amtrak subsidies, or hurricane recovery.
Consider this as a thought experiment: if hurricane recovery ends up costing the Treasury $235 billion, all of it could be paid for by Americans giving up just for one year three tax breaks: the tax-free status of employers’ contributions for their workers’ medical insurance premiums, the deductibility of home mortgage interest, and the $1,000-per-child tax credit for each child under age 17.
Far bigger crisis than hurricanes
Walker does not have the hurricanes primarily in mind. He’s thinking of the fiscal crisis that will hit the nation during the next 30 years unless Congress changes course.
“We are on an imprudent and unsustainable fiscal path,” he told reporters Friday. “We were already deeply in the hole before Katrina hit…. We face a large and unprecedented demographic tidal wave, the retirement of the Baby Boom generation. Unlike most tidal waves, the waters of this tidal wave will never recede. It is a permanent change in the demographic landscape of this country, with profound economic, fiscal, budgetary and workforce implications. Unlike natural tidal waves, evacuation is not an option.”
Walker is urging the president and Congress to examine all spending and taxes, including the tax breaks. President Bush's advisory panel on tax reform is due to unveil its proposals in the next few weeks and may recommend scrapping some tax breaks.
Tax expenditures do not have to compete with spending programs in the annual budget process. Every year members of Congress tussle over how much they should spend on maintenance of national parks or over the number of Navy destroyers that will be built, but the tax breaks go mostly unnoticed and unchallenged.
“There’s no doubt in my mind that some members of Congress understand this, but most members of Congress don’t,” Walker said.
Walker complained Friday that the Bush administration's reaction to the GAO report on tax breaks shows that they “just didn’t get it. They presumed that what we were trying to say was that we needed tax increases. That’s not what this report says. What we’re saying is we need increased transparency and accountability with regard to tax expenditures.”
Walker's special status
Even though some in Congress may prefer to ignore what Walker is saying, his unique status gives him credibility. By law he serves a 15-year term, which gives him a longer time horizon than many members of Congress.
Walker served as a Labor Department official in the Reagan administration and worked in the private sector as a certified public accountant.
Appointed comptroller general in 1998 by President Clinton, he will serve until 2013, by which point Bush’s successor may have left office.
He doesn’t tell Congress which tax breaks to scrap or which spending programs to cut. “We’re not in the policy business,” Walker said.
But he is in the early warning business and he thinks time is running out.