[Congressional Record Volume 161, Number 50 (Wednesday, March 25, 2015)]
[Senate]
[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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