Report- U.S. tax code has too many breaks

WASHINGTON -- As taxpayers recover from finishing their annual filing chores, a presidential commission studying the tax laws has reached the conclusion that there are just too many deductions and credits.

To help taxpayers deal with college costs there are -- depending on which applies to a particular individual -- two different kinds of tax credits, a deduction for student loan interest and special tax-advantaged savings plans. Special urban and rural tax zones encourage investment and job creation. Dozens of other tax benefits help families raise children and save for retirement, encourage adoption, nudge drivers toward hybrid cars and push businesses to invest in new equipment.

"We have lost sight of the fact that the fundamental purpose of our tax system is to raise revenues to fund government," according to President Bush's Advisory Panel on Federal Tax Reform.

The commission's chairman, former Florida Sen. Connie Mack, said its nine members have been surprised at the number of tax deductions and credits.

"It wasn't until we really had the opportunity to listen to so many different people talk about so many different aspects of the code that it really sunk in about how much and how often the code is being used these days to either create incentives or disincentives for either investment or behavior," Mack said

The White House budget office ranks the cost of a deduction for businesses that provide health insurance to employees as the top tax break, worth $126 billion next year. Also high on the list are the popular mortgage interest deduction, a capital gains break for home sales, a deduction for charitable contributions and the child tax credit.

The list includes many tiny tax breaks. Among them are ones that encourage biodiesel fuel, help the elderly and disabled, make interest on educational bonds tax-free and allow teachers to deduct the cost of school supplies.

Overlapping credits

The problem comes when taxpayers try to decipher the rules that govern those credits and deductions. The tax breaks often overlap and typically come with pages of instructions and qualifications.

"It was clearly stated that the level of complication has become so great that in many cases it ends up deterring the activity that you're trying to encourage," Mack said.

Bush has asked the panel to preserve tax breaks that promote homeownership and charitable giving.

Tax breaks started proliferating in the 1990s for two reasons, said Eugene Steuerle, a former Treasury Department official and co-director of the Urban-Brookings Tax Policy Center.

"There's always been this political reward for claiming to do something new rather than merely cleaning up or slightly expanding something that already exists," Steuerle said.

Lawmakers want to brand their own education tax breaks, for example, which means there are multiple deductions, credits and special savings accounts instead of one tax break everyone can use.

Tax breaks also provide benefits without creating a government spending program. But the proliferation of tax breaks end up costing the public because they mean lawmakers cannot lower income tax rates, Steuerle said.

"They make it look like smaller government, when in fact it's actually bigger government," he said.

The tax breaks amount to billions of dollars.

Tax benefits that provide indirect subsidies to homeowners add up to more than the entire budget of the Housing and Urban Development Department.

The earned income tax credit for low wage workers is bigger than any welfare program, including food stamps.

The tax break for businesses that provide health insurance is growing faster than almost all other domestic programs.

Some critics say no one tracks the tax breaks to find out if they succeed in promoting the behavior lawmakers want to encourage. Limitations often mean that some breaks are not available to wealthier taxpayers or poorer ones.

"It is worth noting that the deductions are of little or no benefit to the 40 percent of taxpayers who don't owe taxes," Fred Goldberg Jr., a former Internal Revenue Service commissioner, told the presidential panel.

Would taxpayers give up some of those deductions and credits to make the whole system simpler? Not likely.

"Anytime you've got a benefit, wherever it happens to be, whether it's spending or taxes, people don't want to give them up," Mack said.

This summer, the panel plans to recommend ways to make the tax laws simpler and fairer.

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On the Net:

President's Advisory Panel on Federal Tax Reform: www.taxreformpanel.gov