Friday, October 5, 2012

Tax Plan Politics

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.