When a Tax Is a Tax May Be Pivotal Issue for U.S. Debt Panel

President Barack Obama’s debt- reduction panel is looking at curbing the more than $1 trillion in tax breaks Congress provides for everything from corporate research and development to child care, as a way to raise money without raising income taxes. It’s already facing a backlash.

Senator Judd Gregg, a New Hampshire Republican and commission member, said the bipartisan panel is holding “extensive” talks on the issue, though no decision has been made on which breaks would be targeted.

“The message from the American people was do something about the deficit and the debt,” Gregg said in an interview, referring to the elections in which Republicans picked up at least 60 House seats and six in the Senate, promising to cut spending.

The idea has support from some prominent Republicans.

Martin Feldstein, who was chairman of President Ronald Reagan’s Council of Economic Advisers, has called for reducing the breaks, known as tax expenditures, saying that could both lower the deficit and make the tax code more efficient.

“Although cutting tax expenditures does raise revenue, it is very different from tax increases that raise marginal tax rates,” he said in an e-mail. “Reducing tax expenditures does not reduce incentives to work, to save or to invest.”

Yet Grover Norquist, president of Americans for Tax Reform, said eliminating the tax breaks and using any of the revenue to reduce the deficit is “just a dirty trick for raising taxes,” and “tax increases are not an option.”

Deadline Looms

The disagreement underscores the obstacles facing the commission as it seeks to reach an accord by Dec. 1, when it’s due to report to Congress. Most economists say any effort to reduce the deficit will require some combination of spending cuts and tax increases. The chances of getting panel members to agree on measures to increase revenue may be dim.

Any deficit-reduction plan would have to be backed by at least 14 of the commission’s 18 members, who consist of current and former Republican and Democratic lawmakers, corporate executives and other experts.

The government is projected to run $8 trillion in deficits over the next 10 years, which would push the national debt up to more than $20 trillion. Obama charged the commission with reducing the annual deficit to 3 percent of the nation’s gross domestic product by 2015 from about 9 percent now. Medicare and Social Security will consume a steadily growing share of the federal budget, and the panel is studying those programs, too.

Signing the Pledge

Norquist, 54, who testified earlier this year before the commission, said he is willing to support limiting tax breaks only if accompanied by a “dollar-for-dollar” reduction in income taxes. That wouldn’t do the panel any good because it wouldn’t increase revenue.

His opinion matters because 235 House members and 41 senators who will be serving next year have signed his Washington-based group’s pledge to oppose tax increases.

Lawmakers shouldn’t sign such pledges, said Bob Bixby, head of the Concord Coalition, which promotes balanced budgets. “Social Security and Medicare are widely popular, and they’re going to be more expensive in coming decades,” Bixby said. “That means unless you can find savings elsewhere, it’s going to necessitate higher revenues.”

There are more than 300 individual tax breaks benefiting groups ranging from solar energy companies to film and television productions to restaurateurs, oil companies and owners of historic buildings.

The 16 largest breaks, which include those allowing homeowners to write off mortgage-interest payments, account for two-thirds of the $1.2 trillion in revenue lost to the Treasury every year -- and may be among the most difficult to curb.

Best of Both Worlds

The tax breaks have multiplied in the past 20 years, in part because they offer politicians the best of both worlds: aid that works like a spending program yet is a tax cut. Efforts to pare them back have foundered amid complaints, like Norquist’s, that reducing tax breaks is a tax increase.

Michigan Republican Dave Camp, in line to become chairman of the House Ways and Means Committee, said he is open to the idea of limiting tax breaks if overall rates come down.

“Lowering rates and broadening the base is something I’d be very interested in,” said Camp, who co-leads the tax working group.

His spokesman, Sage Eastman, later said, “Simply moving one provision or another to raise revenue is a tax increase” that could “hurt economic growth.”

Homebuilders’ Opposition

Any move to scale back the tax breaks would also spark opposition from industries that could be affected.

Homebuilders are prepared to fight any proposal from the panel to curtail mortgage tax breaks, said Jerry Howard, president of the National Association of Home Builders, which represents companies such as KB Home and NVR Inc.

“If this comes to the fore, we will do everything we can to nip it in the bud,” he said.

Tax expenditures are getting renewed attention in part because Gregg has written a bill that would finance a cut in rates by eliminating 60 tax preferences, including ones allowing special treatment for business income earned abroad.

Senate Budget Committee Chairman Kent Conrad, co-chairman of the panel’s working group on taxes, says he is looking at the Gregg plan, which is cosponsored by Oregon Democrat Ron Wyden.

Senator Saxby Chambliss, a Georgia Republican, has joined with Virginia DemocratMark Warner in providing outside help for the commission by arranging meetings with experts such as Federal Reserve Chairman Ben Bernanke. Both said lawmakers need to consider clamping down on tax expenditures.

“I’m not a person who’s ever voted for a tax increase,” said Chambliss. “But if we don’t incorporate everything from mammoth reductions in spending to reform of Social Security and Medicare to looking at the revenue side -- if we don’t have all of that on the table for discussion and debate, then we’re not doing our job.”

To contact the reporters on this story: Brian Faler in Washington at bfaler@bloomberg.net; To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net.

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