July 5 (Bloomberg) -- Congressional Republicans are refusing to include tax increases in a bill to raise the U.S. debt limit, even as they fight with each other and with Democrats about how to define just what a tax increase is.
Lawmakers and tax analysts associated with both parties are challenging the approach that says eliminating a tax break is always a tax increase. Instead, they say tax benefits for ethanol, solar energy, mortgage interest and other items are really spending in disguise. If that view is accepted, such tax breaks could be curtailed for deficit reduction and be seen as equivalent to federal spending cuts.
In this semantic debate, members of Congress talk past each other without a common fiscal language. Defining a tax increase has become a central policy question as Congress and the Obama administration seek an agreement that can satisfy Republicans who oppose tax increases and Democrats who insist on them.
“I can tell you exactly how many angels can fit on the head of a pin, but I have no idea what a tax increase is,” said Douglas Holtz-Eakin, who was the economic adviser to 2008 presidential candidate John McCain and opposes including tax increases in the debt-limit bill.
He’s only half-joking. For years, anti-tax activist Grover Norquist’s definition of a tax increase has dominated Republican circles in Washington, and it remains the primary approach, backed with a pledge that Norquist enforces.
Eliminating Tax Breaks
Norquist, the president of Americans for Tax Reform, views the elimination of a tax break as a tax increase unless accompanied by a tax cut, regardless of what the tax break is or who it affects.
Keith Hennessey, who was director of the National Economic Council under President George W. Bush, said when that administration examined legislation, it asked: “Did the bill score as a net tax increase?” If the answer was yes, it was a tax increase and thus unacceptable.
“It was pretty much that simple,” said Hennessey, a research fellow at the Hoover Institution, a policy center at Stanford University in California that promotes private enterprise.
Greg Mankiw, chairman of Bush’s council of economic advisers, said on his blog last week that Republicans should focus on preventing tax rate increases and be willing to trade tax breaks for reduced tax rates or permanent extensions of the lower rates that expire at the end of 2012.
“The distinction between spending and taxation is often murky and sometimes meaningless,” wrote Mankiw, an economics professor at Harvard University.
Former Reagan administration economist Martin Feldstein has also called for caps on deductions and credits.
President Barack Obama has called for what he considers a balanced approach that would include eliminating or curtailing tax breaks. The more tax provisions that Republicans view as spending-like, the closer the two parties can come to an agreement.
Republican Senator Tom Coburn’s public spat with Norquist highlighted the tension on the definitional question. Coburn forced the Senate to vote June 16 on repealing the tax credit for ethanol without an offsetting tax cut, and 32 other Republicans agreed.
Offsetting Tax Cut
Some in that group, including Senate Minority Leader Mitch McConnell of Kentucky, backed Coburn while saying they also were supporting a separate amendment that included an offsetting tax cut and never reached a vote.
“We have to be honest and recognize that if you are going to eliminate systematically a host of deductions and keep the money or spend it for new programs, then you’ve raised taxes,” said Senator Jeff Sessions of Alabama, who is the top Republican on the Budget Committee. “It just is unless we’ve changed the English language.”
Republican Bob Corker of Tennessee said the ethanol credit was an “egregious” example that warranted a special exception to a general rule that still holds.
“I do think the notion of offsetting revenue increases against decreases is an important part of our philosophy,” he said. “But I think you can get caught up in these things and not put in place good policy.”
Still others say a broader look at targeted provisions in the tax code is warranted.
‘Off the Table’
“For me, certainly tax rate increases are off the table,” said Senate Finance Committee member John Cornyn, a Texas Republican. “But I think we’ve seen in things like the ethanol subsidies, we ought to look at those sorts of things across the board.”
Cornyn approvingly cited the work of the commission led last year by former White House Chief of Staff Erskine Bowles and former Senator Alan Simpson. The group recommended eliminating tax breaks and using some of the proceeds for deficit reduction.
The distinction between spending and taxes is real, Hennessey said, because tax cuts, even targeted ones, let people keep more of their money.
“By relabeling this as a spending cut, they’re trying to create a moral equivalence to suggest that raising a dollar of taxes is the same as a dollar of spending, but it’s not,” he said. “They have the same effect on the deficit, but they’re different.”
Spending vs. Taxes
In an August 2010 speech, House Speaker John Boehner of Ohio adopted the idea that spending is embedded in the tax code.
“We need to acknowledge that what Washington sometimes calls tax cuts are really just poorly disguised spending programs that expand the role of government in the lives of individuals and employers,” he said at the City Club in Cleveland.
Asked how Boehner defines a tax increase, spokesman Michael Steel said in an e-mail: “In general, Boehner supports simplifying the tax code to lower rates and make America’s economy more competitive. Our bottom line is always jobs. But no one expects comprehensive tax reform to be part of the debt limit debate.”
Even those who focus on tax expenditures have trouble determining which ones most resemble spending and which are most similar to tax rate increases.
No Firm List
“If there was an agreed-upon list, you’d be done,” said Holtz-Eakin, a former director of the Congressional Budget Office who is now president of the American Action Forum, a Washington group that favors smaller government.
Donald Marron, a Bush administration economist who now directs the nonpartisan Tax Policy Center in Washington, estimates that about two-thirds of tax expenditures in 2007, or $600 billion, were like spending, equal to about 4.1 percent of gross domestic product.
The other definitional problem with taxes stems from the fact that dozens of tax provisions, such as the ethanol break and lower rates, are scheduled to expire in the next few years.
Democrats, similar to congressional scorekeepers, often assume the planned expiration of a tax break as part of their baseline projection, which makes extending current rates look like a tax cut. Republicans tend to focus on current tax rates as a baseline, which means any decision to let tax breaks lapse on schedule is a tax increase.
“You always have to measure an agreement relative to something, and there’s not agreement on that,” Holtz-Eakin said.
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