1. URBAN INSTITUTE Tax Policy & Budget Reform C. Eugene Steuerle Richard B. Fisher Institute Fellow The Urban Institute National Small Business Association Small Business Congress Washington, DC November 28-30, 2012

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4. Federal Revenues as a Percentage of GDP

5. URBAN INSTITUTE Federal Taxes & Spending per Household ($2012) 20122022 Taxes $ 21,000$ 29,000 Total Spending $ 30,000$ 37,000 Tax Expenditures$ 9,000$ 12,000 Interest Spending$ 2,000$ 6,000 Source: C. Quakenbush and C. E. Steuerle, the Urban Institute, 2012. Revenues, outlays, and interest based on CBO Alternative Baseline projections; tax expenditures based on extrapolation of Treasury estimates.

6. URBAN INSTITUTE The Current Squeeze C. Eugene Steuerle and Stephanie Rennane, The Urban Institute 2011. Based on earlier work with Adam Carasso and Gillian Reynolds. Authors' calculations based on data from CBO, OMB and OASDI and HI-SMI Trustees Reports.

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9. Relationship Between Tax & Budget Reform Four ways to reduce deficits (1) Reduce direct spending (2) Raise tax rates (3) Spend less on tax subsidies (4) Work more (& save more) Example: Raise early retirement age –Biggest budget effect: income tax revenues All except (1) related to taxes

10. URBAN INSTITUTE Taxes & the Budget Reforming federal or state taxes involves dealing with thousands of provisions: Entire revenue side of budget, including special taxes for: Social Security & Medicare & highways Incentives for work & saving (which affect future revenues) Tax rates About 1/4 to 1/3 of all “spending” or subsidies More housing subsidies (e.g., mortgage interest) than HUD A larger low-income subsidy (EITC) than welfare (TANF)

11. URBAN INSTITUTE Focus on Residual Why attention to itemized deductions & to those making over $250,000? –Both parties afraid to be honest with middle class, and Republicans oppose top tax rate increase Democrats want burden at top –The residual: tax subsidies hidden tax rate increases –Phase outs: new health subsidies, itemized deductions

12. URBAN INSTITUTE Reality Check Deficits and Itemized Deductions $billion (2015) Deficit (current policy)$ 810 All individual tax expenditures$1,160 Repeal itemized deductions $ 180 Repeal itemized > $50,000 $ 60 Calculations like these, and promised to protect middle class, imply much must be done on the spending side of budget

13. URBAN INSTITUTE Tax Expenditures Expenditure-like preferences in tax code Exclusions, deductions, credits, special rates, timing shifts Goals: social, economic, redistributive Usually targeted at specific groups or for specific activities Other Issues Accounting for them doesn’t make them good or bad Often not “neutral” or efficient E.g., favor one form of energy production over another Some controversy over which to count Most conflicts over capital income taxation

14. URBAN INSTITUTE Top 10 Individual Tax Expenditures, FY2013 (Billions) Employer contributions to health insurance* $ 181 Exclusions for pensions & retirement plans* 165 Mortgage interest deduction and exclusion of net imputed rental income 152 Deductibility of nonbusiness state & local taxes, including property tax on owner-occupied homes 69 Capital gains (except agriculture, timber, iron ore, and coal) 62 Deductibility of charitable contributions (all) 46 Exclusion of Social Security benefits 38 Exclusion of interest on public purpose state & local bonds 26 Step-up basis of capital gains at death 24 Capital gains exclusion on home sales 23 Source: OMB Table 17-2. Notes: *Excludes payroll tax effects. OMB also excludes outlay effects from its estimates. The combined revenue and outlay estimates for FY2013 of the EITC and CTC are $55.7 billion and $40.8 billion, respectively. Extension of the payroll tax cut through CY2012 was also not included in OMB’s standard tax expenditure estimates. Treasury estimates this to be $31.1 billion in FY2013.

15. URBAN INSTITUTE Decline in Fiscal Democracy or Freedom: The Modern Budget Disease Extraordinary promises by both political parties stretching infinitely into the future Building permanency and growth into programs Including automatically growing tax breaks Reducing taxes below levels required to support those programs

16. URBAN INSTITUTE Steuerle-Roeper Fiscal Democracy Index Percentage of Federal Revenues Available for Noninterest, Discretionary Spending

17. URBAN INSTITUTE Why It Really is Different This Time Traditional problem: fiscal profligacy year after year Potential for succeeding periods of give-away legislation But long-term budgets in balance What changed? Built in growth in spending Taxes and bills shifted to future generations Both parties try to dictate future before it has arisen