[Pages S1886-S1887]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

TAX EXPENDITURES

Mr. HATCH. Mr. President, I rise today to correct the record on the
matter of tax expenditures. Many myths have been created and reinforced
by my friends on the other side of the aisle on the subject of tax
expenditures. In my 4 years as ranking Republican on the Senate Finance
Committee, I came to the floor several times to set the record
straight. I am afraid I need to do it again today, this time as
chairman. Today I will focus on the tax expenditures in the individual
income tax. According to 2014 Congressional Budget Office data, the
individual income tax accounts for 47.1 percent of Federal revenue. By
contrast, the corporate income tax accounts for 11.9 percent of Federal
revenue.
It boils down to three basic points. All points that can be derived
from an objective, nonpartisan review of the data from Congress's
nonpartisan official tax scorekeeper. I am referring to the Joint
Committee on Taxation, of which I am the vicechair.
First point: Tax expenditures are not spending, with one exception.
That exception is for refundable tax credits. They count as outlays
under the Congressional Budget Act. Ironically, refundable tax credits
are the policies my friends on the other side are most in favor of
expanding. Just look at the slew of Democratic amendments filed to that
effect. My Democratic friends erroneously describe most tax
expenditures as spending. Yet they seek to expand the minority of tax
expenditures which score as spending. Go figure.
Second point: The vast bulk of tax expenditures tend to distribute
disproportionately to middle and lower Income taxpayers. A cursory
examination of the Joint Committee on Taxation's annual tax expenditure
pamphlet will lead an unbiased reader inevitably to that conclusion.
Third point: The vast bulk of tax expenditures are attributable to
widely applicable tax benefits, like the charitable contribution
deduction, mortgage interest deduction, and State and local tax
deduction.
Mr. President, I ask unanimous consent to have printed in the Record
an analysis of Joint Committee on Taxation data, performed by the
Finance Committee staff.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[March 25, 2015]

Fact Sheet: Who Benefits From Tax Expenditures?
Tax expenditures are often portrayed as ``loopholes'' that
disproportionately benefit the wealthy. However, examination
of the facts reveals that many of the largest tax
expenditures disproportionately benefit middle class
Americans or those with income below $200,000.
According to recent (Feb. 2013) Joint Committee on Taxation
estimates, those taxpayers with adjusted gross income
exceeding $200,000 collectively pay 57% of the individual
income tax burden. The remaining 43% of the individual income
tax burden is paid by those taxpayers with less than $200,000
of adjusted gross income. The following summarizes how the
benefit of various tax expenditure items is split between
``high income'' taxpayers with adjusted gross income
exceeding $200,000 and the remaining taxpayers with less than
$200,000 of adjusted gross income:
Mortgage Interest Itemized Deduction: 35% of the benefit of
the mortgage interest tax expenditure goes to taxpayers with
income exceeding $200,000. Taxpayers with income below
$200,000 receive 65% of the benefit. By a ratio of almost 2
to 1, taxpayers under $200,000 benefit from it.
Earned Income Credit: The earned income credit is fully
refundable. This means that taxpayers receive it in full
whether they pay income tax or not. The earned income credit
is phased out as earned income rises. High income taxpayers
are not eligible to receive any benefit from the earned
income credit.
Child tax Credit: This credit is also limited to lower and
middle income taxpayers. Again, none of it goes to higher
income taxpayers.
Charitable Contribution Deduction: Of all of the tax
expenditures listed, at 57% this one distributes in the
highest proportion to taxpayers above $200,000 in income. The
tax savings benefit of the charitable contribution deduction
is distributed to wealthy taxpayers in the exact same
proportion as the share of total income taxes they pay. This
result hardly seems unfair.
State and Local Income and Sales Tax Deduction: 55% of this
broad-based deduction goes to high income families leaving
the remaining 45% to middle class earners. High

[[Page S1887]]

income taxpayers receive most of the benefit from this tax
expenditure because they also pay most of the state and local
income and sales taxes.
Tax-Free Portion of Social Security Benefits: Just 2% of
the tax benefit from favorable tax treatment of Social
Security goes to recipients with income exceeding $200,000.
Real Property Taxes: While some may say that only those
with villas are taking the property tax deduction, 75% of the
real property tax benefit goes to taxpayers with less than
$200,000 of income.
Education Credits: Once again, 100% of the benefit goes to
taxpayers with income under $200,000.
Medical Expense Deduction: 88% of this tax benefit goes to
taxpayers with income under $200,000.
Child Care Credit: This is a modest tax credit targeted for
taxpayers that incur child care costs in order to work. Like
the child tax credit, it mainly benefits low and middle
income families. 95% of the benefit goes to taxpayers with
income under $200,000.
Student Loan Interest Deduction: This tax benefit is phased
out as a taxpayer's income rises. All of the benefit goes to
taxpayers earning less than $200,000.
____

10 Largest Tax Expenditure Items

JCT Estimated 5 Year (2012-2016) Amounts

1) $707 Billion--Exclusion of Employer Provided Health Insurance and
Health Care Benefits

Employer paid premiums for health insurance and other
health benefits are generally not included in the employee
recipient's taxable income and are also not subject to
employment taxes. In addition, employees can usually pay for
their share of employer provided health insurance and other
health benefits with pretax earnings.

2) $649 Billion--Tax Deferred Retirement Savings Plans

Both employer and employee contributions to pension plans
are generally excluded from taxable employee compensation.
Earnings on pension plan assets are also tax exempt.
Employees are taxed upon receipt of pension plan
distributions. Taxpayers accumulate savings for retirement
more rapidly with this benefit of tax deferral.

3) $596 Billion--Reduced Tax Rates on Long-term Capital Gains &
Dividends

Recently enacted legislation has dramatically increased the
taxation of both long-term capital gain and qualified
dividend income for high income individuals. The tax rate for
these high income individuals has increased from 15% to 20%
beginning in 2013. This increased rate is lower than the
maximum rate applied to ordinary income which is now 39.6%.

4) $402 Billion--Deduction of Nonbusiness State & Local, Income, Sales,
Personal Property and Real Property Taxes

Individual taxpayers can deduct amounts paid for non-
business state and local income, sales, real estate and
personal property taxes as an itemized deduction.

5) $364 Billion--Deduction for Mortgage Interest on Owner Occupied
Residences

Interest on home mortgage loans may be deducted. There is a
$1,000,000 limit on the maximum qualifying loan amount and it
can be used to carry up to two taxpayer residences. Interest
on additional indebtedness of up to $100,000 is also
deductible when such indebtedness is secured by the
taxpayer's primary residence.

6) $320 Billion--Earned Income Credit

The earned income tax credit is designed to subsidize the
wages of low and moderate income taxpayers. The credit is
greatly enhanced when the taxpayer is also supporting
children. This credit is fully refundable in the case of
taxpayers that have no income tax liability because of other
provisions in the tax system such as the standard deduction
and personal and dependency exemptions.

7) $289 Billion--Child Tax Credit

Under current law taxpayers are entitled to a partially
refundable tax credit in the amount of $1,000 for each
qualifying child under the age of 17. The credit is phased
out for high income taxpayers.

8) $240 Billion--Exclusion of Cafeteria Plan & Other Employee Fringe
Benefits

Under current law an employer's qualified cafeteria plan
allows employee participants to voluntarily reduce their
otherwise taxable compensation so that the reduction can be
used to purchase certain benefits such as health insurance
and dependent care with before-tax earnings. Repeal of this
provision would cause employees to purchase these benefits
with after-tax earnings.

9) $236 Billion--Exclusion of Capital Gains at Death

Under current law the tax basis of property included in a
decedent's estate is adjusted to fair market value on the
date of death. Accordingly, the gain element in a decedent's
appreciated property escapes income tax.

10) $225 Billion--Deduction for Charitable Contributions

Individual taxpayers can deduct gifts to qualified
charitable organizations as an itemized deduction. When a
taxpayer makes a gift of long-term capital gain property
(i.e., appreciated stock) the amount of deduction is equal to
the value of the gift. Accordingly, the capital gain in the
gifted property is not taxed.
____

[March 25, 2015]

Debunking the Myths of So-Called Tax Expenditures

Some in Washington have claimed that eliminating tax
expenditures is the same as getting rid of wasteful spending
or closing unwanted loopholes. The reality is somewhat
different. Middle-class families would hardly agree that
incentives to save for college and retirement or to buy a
home are loopholes. Here's a closer look at the myths of tax
expenditures:
Myth: Tax Expenditures Are Spending.
Fact: The federal government cannot spend money that it
never touched and never possessed. Tax expenditures let
taxpayers keep more of their own money. And only by the
public consent is the government permitted to take some of it
in taxation to pay for certain public goods. When tax hike
proponents say we are giving businesses and individuals all
this money in tax expenditures, they are incorrectly assuming
that the government has that money to give in the first
place, when in fact it does not. To the contrary, the
government never touches the money that a taxpayer keeps due
to benefitting from a tax expenditure, whereas with spending,
the government actually collects money from taxpayers and
then spends it.
Another difference between tax expenditures and spending is
that reducing or eliminating a tax expenditure without an
offsetting tax cut to reach a revenue neutral level will
cause the size of the federal government to grow, while
reducing or eliminating spending causes the size of the
federal government to shrink.
Myth: Tax Expenditures are Loopholes.
Fact: This is deliberately inaccurate. A loophole is
something that Congress did not intend and would generally
shut down, at least going forward, once it learned of the
loophole. Tax expenditures, by contrast, were generally
placed by Congress into the tax code deliberately. For
example, the largest tax expenditure is the exclusion for
employer-provided health insurance and benefits. The second-
largest: the home mortgage interest deduction.
Whether you agree with a particular tax expenditure or not,
an honest debate requires recognition that tax expenditures
were designed by Congress with economic or social goals in
mind and are not inadvertent loopholes.

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