The Great Tax Giveaway: How the Influential Win Billions in Special Tax Breaks (Part 1)

April 10, 1988

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"In the overall scheme of events," said Bob Packwood just prior to enactment of the 1986 act, a few billion dollars in transition rules represents "a relatively minor part of the whole bill."


It was - and is - such an attitude that has contributed to the runaway federal deficits of the 1980s. And it explains why the 1988 deficit will be up, rather than down, as the reformers promised when they sold the 1986 tax act.

For the first five months of the current fiscal year that began last October, the government is running $89.7 billion in the red. That exceeds the $72.7 billion deficit posted for the entire year of 1980, when Ronald Reagan was campaigning for his first term.

It also surpasses the cumulative deficits for all of the 1950s and virtually all of the 1960s, thereby guaranteeing that more and more tax dollars will be diverted to interest payments on a $2.4 trillion - and fast growing - national debt.

With seven more months to go in the fiscal year, and a deficit already of $89.7 billion, Congress will not come close to meeting the goals set in the 1985 deficit reduction law that was to move the government into the black - permanently.

Dubbed Gramm-Rudman-Hollings for its three sponsors - Sens. Phil Gramm (R., Texas), Warren B. Rudman (R., N.H.) and Ernest F. Hollings (D., S.C.) - the law set a maximum deficit of $108 billion for 1988.

Congress recast the Gramm-Rudman-Hollings targets last year and fixed the new 1988 maximum at $144 billion, a figure that the government still may not meet.

All this notwithstanding the euphoric statements by congressional leaders last December when they pushed through federal budget and spending bills that were widely - and incorrectly - portrayed as deficit-cutting measures.

Sen. John F. Kerry (D., Mass.) described the legislation as "welcome relief from the distorted budgetary pattern of 1980 to 1987." It will, he said, "reduce the federal deficit by $80 billion within two years, by cutting $33.7 billion in 1988 and $46 billion in 1989."

Sen. Robert C. Byrd (D., W.Va.), Senate majority leader, applauded the measure as "the largest two-year legislative package of permanent deficit reduction. That is not a mouse. It is an achievement of which we can be proud."

What the legislation did was allow members of Congress seeking re-election, as well as those seeking their party's presidential nomination, to put off until some time after the November 1988 election the tough decisions that will have to be made on stiff tax increases and sharp spending cuts.

In the meantime, some lawmakers are quietly building support among their colleagues for enacting new taxes and raising existing ones. Among their favorites: A national sales tax, a value-added tax and a whopping increase in the gasoline tax.

Each of the taxes is regressive. Each would fall disproportionately on low-and middle-income individuals and families.

The value-added tax is especially appealing to certain members of Congress because it is a hidden levy. It is, in effect, a multiple sales tax built into the cost of consumer goods at different stages in the manufacturing process. As a result, consumers are unable to determine how much tax they are paying.

Whatever the economic cost of personal tax breaks, it is dwarfed by the cost in fairness.

In 1986, Congress extended preferential treatment to thousands of individual taxpayers and hundreds of companies at the expense of other individuals and companies in similar situations.

It gave tax breaks to urban development projects in some cities and withheld them in others. It gave tax breaks to some trucking companies and withheld them from others. It gave tax breaks to some insurance companies and withheld them from others. It gave tax breaks to some housing projects and withheld them from others. It gave tax breaks to some utilities and withheld them from others. It gave tax breaks to some universities and withheld them from others. It gave tax breaks to some communications companies and withheld them from others. It gave tax breaks to the steel industry and withheld them from the copper industry.

Without exception, Congress denied comparable breaks to middle-income taxpayers who shoulder the brunt of the overall federal tax burden. But this was in keeping with the way Congress has been making tax law since the late 1960s.

And it was typical of so many legislative revisions that have fueled a growing distrust of the tax system among middle-class taxpayers, an attitude that has been reflected in one public opinion poll after another.

That distrust - rooted in the belief that there is one set of rules for the ordinary citizen and another set for the privileged - surfaced in the 1970s and has led to steadily rising noncompliance by taxpayers seeking to avoid, or even evade, their taxes.

The 1986 tax act did nothing to dispel the belief that the system is riddled with inequities.

For example, Congress eliminated the deduction for interest payments on student loans for millions of middle-income taxpayers, but offered no special exemptions.

It eliminated the investment tax credit for family farmers who bought tractors, but offered no special exemptions.

It eliminated the investment tax credit for drivers who own their tractor- trailer rigs, but offered no special exemptions.

Congress did, however, grant a special exemption that lowered the tax rate on a millionaire securities dealer.

It did grant a special exemption that allowed a wealthy Chicago family to claim the investment tax credit on a warehouse.

And it did grant a special exemption that permits a large trucking company, whose principal owner is a major contributor to the Republican Party, to claim the investment tax credit on its trucks.

The disparate treatment was more evident when considering two specific groups of taxpayers and two specific changes in the law.

In 1984, the latest year for which complete figures are available, 11.7 million families with annual incomes of $20,000 to $40,000 claimed the working-couple deduction. It allowed them to avoid more than $1.5 billion in taxes.

Because Congress, in the 1986 tax act, eliminated that deduction - without any exceptions - all 11.7 million families lose it when they file returns this year, and many will pay higher taxes as a consequence.

Again during 1984, about 400,000 individuals and families with incomes above $100,000 claimed the investment tax credit. The writeoff allowed them to avoid $1.6 billion in taxes.

Like the working-couple deduction, the investment tax credit was eliminated. But not for everyone. Through personal tax breaks, Congress retained the credit for thousands of upper-income taxpayers.

All this helps explain why the House Ways and Means Committee and Senate Finance Committee have resolutely refused to name individual lawmakers who request tax-immunity provisions for constituents.

It helps explain why the provisions are couched in language that conceals the beneficiary's identity.

And it helps explain why the tax-writing committees decline to say how many people and companies are in situations similar to those of the beneficiaries, yet do not receive special consideration.

The entire legislative process surrounding tax indulgences is so dependent on congressional secrecy that most members of Congress are unaware of the provisions when they vote on tax legislation.

In 1986, congressional leaders withheld even a partial list of tax preferences from House members until after they voted in favor of the legislation. The process has become so byzantine that, at times, key lawmakers involved in writing tax bills profess their ignorance about breaks that they personally approved.

Just before the Senate ratified the Tax Reform Act of 1986, Sen. Howard M. Metzenbaum (D., Ohio) questioned the Senate Finance Committee's Bob Packwood about one particular provision.

Referring to a vaguely worded clause that would permit anonymous dairy farmers, located mostly in California and Nebraska, to escape payment of $22 million in taxes, Metzenbaum asked:

"I think we have a right to know. Who are those persons? What do they have going for them? Are they small farmers? Are they large corporations? More importantly, maybe, are they American-owned? Are they foreign corporations? Are they foreign-owned corporations?"

Packwood, who with Dan Rostenkowski was responsible for approving or rejecting the custom-tailored tax breaks, replied:

"I have no idea who the individual or corporate beneficiaries are."

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