Obama's digging himself into a tax reform hole

The president says he wants to get rid of tax loopholes, but he's come up with a new set of them for his 2012 budget.

You know the aphorism: When you’re in a hole, first thing to do is stop digging. When it comes to tax reform, President Obama is still shoveling away.

In recent weeks, the president has had a lot to say about the need to eliminate tax loopholes and cut tax rates, especially for corporations. Yet his 2012 budget is filled with new tax breaks for favored activities.

The fiscal plan is actually a mix of small-bore tax cuts and tax increases. True, he’d eliminate preferences for oil, gas, and coal and for some activities of multinational corporations. But he’d also create, extend, or expand a whole host of other tax subsidies. There are new tax credits for investments in green energy and energy-efficient commercial buildings. There are $2.5 billion in new tax breaks for businesses in “designated growth zones.” That’s on top of an additional $1.8 billion in “New Markets” tax credits and $2 billion in special tax breaks for transit projects in New York City.

And there’s more. He’d expand and make permanent the research and experimentation (usually called the R&D) tax credit, at a cost of $100 billion over 10 years. This even through the evidence suggests that while the credit results in cost shifting within companies, it does relatively little to encourage research that wouldn’t have been done anyway.

There is even a $250 “refundable tax credit” for government employees who don’t get Social Security. Imagine the howls of protest Obama would hear if he proposed to write a $250 check to these workers. But this is a tax credit, so it’s different. Except, of course, it’s not.

All of this is what my Tax Policy Center colleague Gene Steuerle long-ago dubbed tax deform. Instead of broadening the tax base and getting government out of economic decision making, Obama is proposing to narrow the base and wade hip-deep into those choices. For Obama, fossil fuels are bad, alternative energy is good. So he takes away the oil and coal subsidies but adds new ones for solar and wind.

Obama has no chance of killing the oil and coal tax breaks, but even if he did, the next guy would probably just add them back (national security, you know) without dumping the tree-hugger stuff. And that’s why the tax code is crumbling under its own weight.

In fairness to Obama, he’s hardly the first president to lard his budget with new tax preferences. President Clinton was infamous for narrowly targeted “feel-your-pain” credits that he’d hand out like big city pols once distributed Thanksgiving turkeys. President Bush did the easy part of reform by cutting rates in 2001, but he added a bunch of new subsidies at the same time.

The difference now is that Obama keeps talking up tax reform even as he loads the code with more goodies. The more of this special pleading stuff he adds, the harder they will be to clean out if he really does try to lower rates someday. Worse, he’s increasing tax breaks at the same time he’s make painful cuts to a small slice of domestic spending. Is easing the commute from Westchester to Wall Street really a higher federal priority than helping low-income families pay their heating bill?

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