Archive for the ‘Tax Expenditures’ Category

Ethanol Vote Signals Change in Tax Policy

Friday, June 17th, 2011

For many years, an uneasy detente between corn-belt Senators and their urban, southern, and mountain state colleagues has protected the booming ethanol industry, but there are signs in the vote on Thursday that it is now “open season” on all tax expenditures.

As Nebraska Senator Mike Johanns remarked, after the vote, “I think we’re looking at everything now.” A sentiment echoed by California Senator Diane Feinstein who declared the era of large subsidies “really over.”

What else is on the chopping block? Earlier in June, senior Ways & Means Committee Republican Rep. Devin Nunes said, “it’s universally accepted that most of these credits are going to be gone.” He’s promoting a reverse auction process that could replace the existing set of production tax credits for wind, solar and other advanced energy technologies.

If ethanol subsidies and other renewable energy subsidies are threatened, what about tax benefits for mostly urban constituencies, such as historic preservation tax credits? Will the unravelling of the ethanol detente affect those policies as well?

As budget concerns become increasingly salient and a new group of House and Senate leaders with no allegiance to the old bargains gain in authority, Treasury’s annual list of tax expenditures is looking increasingly like a menu of offsets.

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Feldstein Proposes 2% Cap on Tax Expenditures

Thursday, May 5th, 2011

Harvard Economics Professor Martin Feldstein says he is studying a proposal to cap the amount of tax savings individual taxpayers can claim from “tax expenditures” to 2% of adjusted gross income. 

Under the cap, taxpayers would calculate their taxes as usual, claiming deductions for state and local taxes, the mortgage interest deduction, property taxes, and other itemized deductions. 

However, these deductions would be disallowed to the extent that they reduce tax liability by more than 2% of Adjusted Gross Income.  Employer provided health insurance evidently would be added to AGI and treated as a deduction, subject to the cap as well.

Using a National Bureau of Economic Research (NBER) model and a file of 15ok 2006 tax returns, Prof. Feldstein predicts that the cap would raise $278b in 2011 alone, and more in subsequent years.  A 3% cap would raise $208b, and a 5% cap would raise $110b in 2011. 

In an example, Prof. Feldstein illustrates that a taxpayer (perhaps a joint filing couple) earning $150,000 with a $30,000 of itemized deductions and $10,000 of employer provided health insurance would see a federal tax increase of $4,600, due to the cap.

One of the novelties of the proposal is that employer-provided health insurance would be taxed just as if it were salary income.   It would appear on a “modified version of the current tax form.”

Prof. Feldstein was Chairman of the President’s Council of Economic Advisors from 1982-84.   He says he is working on the cap proposal with Maya MacGuineas of the New America Foundation and Daniel Feenberg of the NBER.

There are already a number of limits on itemized deductions that will either spring back to life  (PEP and Pease) or will affect tens of millions of additional taxpayers in 2013 (AMT).  

Prof. Feldstein argues that his proposal would “simplify” the code by “inducing” 35 million taxpayers to use the standard deduction, but, if anything like this moves forward in Congress, middle income taxpayers with high health insurance premiums, high mortgage costs, or high state taxes will wonder why Congress is considering yet another law to dilute the value of expected tax benefits. 

Prof. Feldstein doesn’t say specifically how charitable deductions would be treated, but, under his scheme, they would be limited by the cap as well.

Posted in Health, Tax Expenditures, individual | No Comments »