Eduardo Porter summarizes his point in today's Economic Scene column in the New York Times when he states, "Tax expenditures die hard." As an economist, I have long called for reform, working to raise the issue during the many deficit commission and budget negotiations since the 2008 recession took over the nation's headlines. As Porter correctly notes, a little sunshine on tax expenditures could be a game-changer in terms of who gets what from Washington.
Porter echoes my argument that tax expenditures are both inefficient and regressive through his analysis of the lopsided effects of $1.1 trillion in tax breaks that are designed to promote social policy - like housing, medical insurance and retirement savings- but operate through the back door of the budget. Because these tax breaks – or foregone tax revenue – never see the light of day in a budget hearing or as part of the annual appropriations process in the U.S. Congress, it often goes unnoticed that they don't work.
In October of 2015, SCEPA co-hosted "How Can Tax Reform Address the Income Retirement Crisis?" with the Center for American Progress. We discussed the erosion of American's retirement security and how the tax code can be used to encourage retirement savings. SCEPA has also gone directly to Capitol Hill, holding a briefing for lawmakers, their staff and advocates in October of 2010. David Walker, former Comptroller General of the U.S., called for the need to implement statutory budget controls that address tax preferences, and and Eric Toder of the Urban Institute presented data supporting the fact that the well-off are more likely to benefit.
Retirement savings tax breaks are particularly lopsided. Rather than increasing retirement plan coverage and savings rates, most of these subsidies go to high earners who already have adequate retirement savings and can simply shift savings to tax-favored accounts. A 2005 GAO report cites research showing that no more than 9% of savings under the IRA tax expenditure are new savings engendered by the program. Taxpayers in the highest-earning 20% claim nearly 80% of the total benefits of entitlement programs for retirement accounts. If the total sum of these tax breaks were turned into tax credits, every taxpayer would receive $600 per year.
This behind-the-scenes tradition trickles down to the states. With little fanfare or acknowledgment, many states pass through these tax breaks. In Connecticut, New York and California, a credit would yield an extra $53, $158, $145, respectively. This means that on top of a federal tax credit, taxpayers in New York could receive as much as $758 per year to contribute to their retirement account. This may not sound like much, but it would be seed money for the workers who need it most: those that have little to no retirement savings.