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Not all government spending is in the budget

Jim HamillIn today’s column, we talk about, me.

Well, not for the whole column. But at least let me start with me.

My youngest daughter is working on a master’s degree in public policy. Her interests lie in issues affecting women and children across the globe.

But she has already been asked to address two public policy issues dealing with, wait for it, taxes! And she actually contacted the old man for advice!

My initial advice was that policy analysis involves assessment of the impact of alternative policies. It is the policy maker who must overlay a value system in determining what action to take. But the policy maker needs information about the impact of alternative actions.

We have a big budget deficit. Let’s assume that tax policy makers are a bit curious about this. It appears that we have a combination of low revenues (as a percentage of GDP) and high spending. Is there spending that might be a target for future restraint?

The interesting thing about this question is that spending cannot be measured just by looking at the expenditures side of a classic budget. To make certain spending initiatives more politically palatable, our policy makers have greatly expanded the use of “tax expenditures.”

The process works like this. So-and-so proposes a new spending program. Others push back saying we cannot afford new spending. So-and-so proposes a tax credit or deduction for citizens who spend for this purpose on their own initiative. Others say, a tax break, sure!

The 1974 Budget Act created the definition of a tax expenditure. It is the revenue lost due to enactment of a special tax provision. What is special? The provision is a deviation from a “normal” tax base.

Policy analysts actually have to define what a normal tax base is to classify and to measure tax expenditures. But the analysts diligently do this task and then report the cost of the revenue loss, which has the same effect on the federal budget as a direct expenditure. This is instead called a tax expenditure.

The policy analysts report the size of tax expenditures so that policy makers will be able to decide if the expenditure is “worth” it. The policy maker has to apply some value judgment in this decision, but should also want to know the dollar cost to determine if that cost is justified in relation to the value.

Being the good analyst I advise my daughter to be, I make no effort to judge the particular expenditure. I’ll just report the numbers. As Will Rogers said, I don’t tell jokes, I just watch the government and report the facts.

Policy makers want to encourage savings for retirement. So the tax cost for retirement savings in employer plans is $350 billion each year. IRAs and Roth IRAs add $27 billion to this each year.

Policy makers long ago established a system of employer-provided health care. The tax cost for this is $190 billion each year. The cost of the new qualified business income deduction for individuals is $50 billion per year.

People like their homes. Deductions for mortgage interest cost $25 billion each year in lost revenue. The ability to exclude gain from the sale of a principal residence costs $40 billion annually.

What’s interesting is that policy makers propose eliminating some low-cost benefits from time to time. Teachers can deduct as much as $250 each year for out-of-pocket supplies. This costs $200 million each year. It almost got tossed in the 2017 law change.

Like-kind real estate exchanges have been on the chopping block. The cost? $8 billion each year. Residential energy tax credits need to be renewed periodically. The cost is $750 million annually.

Many tax expenditures require that the individual itemize tax deductions. In 2020 only 9.6% of individuals itemized. For those with modified adjusted gross income of $200,000 or more 46% itemized. So items like property taxes, charitable gifts and mortgage interest disproportionately benefit the higher income folks.

Do not hit “send” on that email!! I am not judging. I am just providing the facts. Others will have to judge. Not you. Not me. Our elected representatives’ values will decide the merits of these expenditures. OMG.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

 

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