You may have been pulling your
hair out during the presidential debate the other night for any number of
reasons, but one of them was surely that the President and Mitt Romney were making conflicting factual claims about taxes that simply couldn't all be true.
Case in point: President Obama
said, over and over again, that Romney planned to cut tax revenues by $5
trillion, thereby swelling the deficit, while Romney said, over and over again,
that his plan wouldn’t reduce revenues or grow the deficit at all. Those two
claims can’t both be right, can they?
It turns out that it all depends
on what you mean by the word “plan.” What Romney is definitely planning is to
reduce tax rates by 20% across the board. Over 10 years, that alone would
reduce Federal revenue by about $5 trillion, and that’s where the President
gets his number. But Romney also says he will get the revenue back from “closing
loopholes,” that is, by eliminating some
of the many deductions, exemptions and credits with which the tax system is
riddled.
The trouble is that he hasn’t been
at all clear about which loopholes he would close, and understandably so. After all, when you close a loophole, you
raise somebody’s taxes, and that’s not something we talk about in polite
society. And a lot of number crunchers have
concluded that closing enough of them to make the whole package “revenue
neutral” would end up raising taxes for middle income families, which Romney
has promised not to do. Romney is also apparently vaguely planning that the problem will be partly solved by that old Republican favorite, supply side economics: lower tax
rates = happier “job creators” = more jobs = higher tax revenue.
So while the Romney plan is pretty
clear about cutting rates, it’s pretty half-baked when it comes to assuring revenue
neutrality. Whether it’s fair or not to call that a plan to cut revenue by $5
trillion – which is what the President calls
it – you can decide.*
Whatever it is, if Romney could
make his tax plan work it would have, on the surface at any rate, a certain
appeal. It’s the classic prescription
for tax reform: if we shut loopholes, broaden the tax
base and reduce tax rates, we can simplify the tax system without a loss of revenue.
But before we do away with any
particular credit or deduction or exemption, it’s important to bear in mind that there might be a
good reason it was created in the first place.
For example, the Federal earned income tax credit was enacted to provide
tax relief to low income working families. And the mortgage interest deduction
is intended to encourage home ownership.
Are those really things we want to give up?
Consider the attempt in the 2011
legislature to eliminate Montana’s energy efficiency tax credits. Montanans who
improve the energy efficiency of their homes and businesses can claim a 25% tax
credit for the cost of those improvements.
Individuals can claim up to $500 and a married couple filing jointly can
claim up to $1,000. Homeowners can install anything from energy-saving
appliances and programmable thermostats to energy-efficient windows, and the
credit helps them afford these simple improvements that reduce energy use and
lower their monthly energy bills. The community
benefits as well, with greater energy independence, lower environmental costs
from energy production, and the robust growth of businesses that provide energy
conservation products and services.
The Montana legislature created
these tax credits in 1983. And although
thousands of Montanans since then have used the credit to capture energy
savings in their homes and businesses, the Legislature in 2011 passed a bill
(SB 253), carried by Senator Bob Lake (who’s currently running for the Public Service
Commission) that repealed the credit entirely.
Lake’s bill, which initially called for the repeal of a whole slew of
other credits, was intended to generate revenue to offset a Republican plan to
reduce the business equipment tax
Fortunately, Governor Schweitzer
vetoed SB253, which he called “largest tax increase proposed by the 2011
Legislature.” And he was right. In 2010, 29,000 Montana households claimed a
total of $10.4 million in energy conservation
credits on their state income taxes. Eliminating these credits would have made low
and middle income families pay more (both in higher income taxes and higher
energy bills) in order to provide business equipment tax relief. Almost 70% of that relief would have gone to
about 450 large companies with more that $1 million worth of equipment. And the
progress Montanans have made in conserving energy would have suffered a sharp
setback.
Energy efficiency is the least
expensive, cleanest, and most reliable energy resource for Montana utilities—
and the same goes for Montana families.
Thankfully a misguided tax policy proposal failed, and Montanans still
have the opportunity to take advantage of tax credits that help pay for energy
efficiency improvements in their homes and businesses.
* Robert Samuelson, writing in the
Washington Post, doesn’t
think it’s fair, but he doesn’t think that Romney is being a straight
shooter, either.
