Lawmakers hoping next year to eliminate tax breaks in order to raise the tax revenue needed to finance cuts in income tax rates have their work cut out for them, according to a new report by the nonpartisan Congressional Research Service (CRS).

The CRS analysis, which is not available to the public, was obtained by the Washington Post, which reported on the findings on March 24.

The report concludes that it will be almost impossible for Congress to repeal the tax breaks that account for the greatest revenue losses to the U.S. Treasury—precisely because these breaks are hugely popular with voters and are intended to incentivize important policy objectives. Read more.

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Tax Breaks Hard to Eliminate: New Report

Wed Apr 18, 2012

Lawmakers hoping next year to eliminate tax breaks in order to raise the tax revenue needed to finance cuts in income tax rates have their work cut out for them, according to a new report by the nonpartisan Congressional Research Service (CRS).

The CRS analysis, which is not available to the public, was obtained by the Washington Post, which reported on the findings on March 24.

The report concludes that it will be almost impossible for Congress to repeal the tax breaks that account for the greatest revenue losses to the U.S. Treasury—precisely because these breaks are hugely popular with voters and are intended to incentivize important policy objectives.

CRS ranks the most expensive tax breaks, or incentives, by their relative revenue loss as follows:

Tax break graphic in 2014

Indeed, according to CRS, a full 90% of the total annual lost revenue from all the federal tax breaks is accounted for by 20 of the most popular and socially valuable tax incentives.

For example, the number one most expensive tax break, estimated to cost the Treasury $164 billion in FY 2014 alone, is the tax exclusion workers enjoy on their employer-sponsored health benefits. That’s because premiums employers and employees pay for their health coverage remain completely tax free—an extraordinary tax break many workers don’t realize they have.

The number two most expensive tax break, costing the Treasury almost $163 billion in FY 2014, is the tax exclusion for employer and employee contributions to pensions, 401(k) plans and IRAs. This would include, for example, pre-tax contributions workers make to their traditional 401(k) and related defined contribution plans.

And number three on the list is the tax deduction for mortgage interest payments, expected to cost the Treasury just under $100 billion in FY 2014. With the housing sector still in the doldrums this deduction is thought to be critical to reviving home ownership.

As popular and socially important as they are, these “Top Three” tax breaks alone account for over one-third of the total revenue the Treasury loses every year because of various tax incentives, loopholes, exclusions and deductions.

What all this means, of course, is that Plan A for cutting outsize federal budget deficits ($1 trillion+ for four straight years) and America’s gargantuan public debt burden (now $16 trillion and counting), i.e., eliminate tax loopholes and simultaneously slash tax rates, is proving to be a much bigger challenge than first thought.

Let’s face it: annual budget deficits can’t be allowed to get any bigger. Meanwhile, the only way to generate more revenue without raising middle class tax rates is to eliminate certain loopholes. If it turns out that’s not really feasible, and the new CRS report suggests that it’s not, lawmakers will have to look for a Plan B.

There is at least one possibility: throw in the towel on “eliminating” the most expensive tax breaks and instead focus on “limiting” their benefits.

For example, as President Obama has proposed, the maximum benefit from any tax break could be limited to 28% regardless of an individual’s actual tax bracket. Thus, someone in the 35% bracket with a total of $15,000 in employer-provided health benefits could claim a maximum tax deduction of $4,200, not the $5,250 tax saving he or she enjoys today.

The tax exclusion for employer-provided health benefits would not be eliminated but it would be capped for those in the highest tax brackets. To be sure, the assumption would remain that the quid pro quo for such curtailment of tax loopholes would be a commitment to reducing income tax rates for all taxpayers.

The new CRS report shows that “Tax Reform,” a trumpeted goal of both political parties for different reasons, is likely to prove more difficult than anyone imagines. But being more difficult does not make it impossible—if lawmakers show a willingness to compromise and make budget deficit and public debt reduction a bipartisan priority.