'Animal Farm' tax philosophy
Writing off your foreign taxes

Popular, and costly, tax breaks that could be trimmed to help reduce the deficit

Congress returns to Washington, D.C., next week -- consider this fair warning! -- and lawmakers have their plates full.

In addition to the jobs agenda that Obama wants them to address, there are 11 appropriations bills that need to be dealt with so federal agencies can continue to operate when the new fiscal year kicks in on Oct. 1.

And we can't forget the Super Congress committee, officially named the Joint Select Committee on Deficit Reduction, that was created as part of the debt ceiling increase law and which is charged with finding ways to cut federal spending.

While the six Republican members of the committee aren't going to admit it, at least not publicly, any deficit plan also is going to require some additional tax revenue. So they'll be looking at back door ways to come up with the tax money.

The panel reportedly has been studying previous deficit reduction plans. But I suspect they've also thumbed through the document created back in March by the Joint Committee on Taxation that detailed just how much money is lost to some popular tax breaks.

Tax savings for us, tax costs for Uncle Sam: The Joint Committee's calculations found that the Treasury will be out more than $3 trillion between 2010 and 2014 thanks to these tax deductions, credits and exclusions from income afforded individual taxpayers.

You can check out the lost tax revenue figures in a lovely slide show over at Bankrate.com.

In putting together that piece, I got to wondering how the current top tax breaks as far as lost tax collections compared to previous years. The Joint Committee had an answer to my question. The same document also included the largest tax expenditures for 2005-2009.

So I combined the Joint Tax Committee's tax break calculations into the table below.

Individual Tax Expenditures
2010-2014 & 2005-2009 Comparisons

(Ranking for each time period in parentheses)

Tax expenditure
and Function
Total Amount
(in billions)
Total Amount
(in billions)
Exclusion of employer contributions for health care, health insurance premiums and long-term care insurance premiums

$659.4 (#1)

$493.7 (#2)
Deduction for mortgage interest on owner-occupied residences $484.1 (#2) $434.2 (#3)
Reduced rates on tax on dividends and long-term capital gains $402.9 (#3) $356.8 (#4)
Net exclusion of pension contributions and earnings: Defined benefit [employer] plans $303.2 (#4) $567.8 (#1)
Earned Income Tax Credit $268.8 (#5) $195.1 (#7)
Deduction of nonbusiness state and local government income, sales and personal property taxes $273.3 (#6) $185.8 (#8)
Net exclusion of pension contributions and earnings: Defined contribution plans $212.2 (#7) Not applicable
Exclusions of capital gains at death $194.0 (#8) $215.6 (#6)
Deduction for charitable contributions, other than for education and health $182.4 (#9) $159.2 (#9)
Exclusion for untaxed Social Security and railroad retirement benefits $173.0 (#10) Not applicable
Tax credit for children under age 17 Not applicable $231.7 (#5)
Exclusion of benefits provided under cafeteria plans Not applicable

 $134.4 (#10)

$15 billion shift: Interestingly, the numbers aren't that much different from 2005 to 2009 and 2010 to 2014.

The tax breaks in the five years starting in the mid-2000s and going to the end of that decade accounted for $2.97 trillion in lost federal revenue.

For 2010 to 2014, the projected foregone revenue is $3.12 trillion, around a mere $15 billion more. Given the profligacy of Capital Hill, that's not too bad.

Tax break consistency: Also notable is that eight tax expenditures showed up on both lists.

The rankings for the eight were slightly different in each time frame, but their appearance indicates just how much we, and the lawmakers we elect, like them.

They include the mortgage interest deduction, the cost of employer provided pension plans, capital gains tax breaks (both via low rates and excluded at death), charitable contribution deductions, employer provided health care (and other insurance) costs, state and local tax write-offs and the Earned Income Tax Credit.

The continuation of these tax breaks is in keeping with the Joint Committee on Taxation's research.

"Of the 128 tax expenditures reported in 1987 for fiscal year 1988, 100 remained in effect in fiscal year 2007," noted the report. "Of the approximately 270 tax expenditures either in existence in fiscal year 1988 or adopted at any time between 1987 and 2007, 202 remained in place in 2007. Thus, in general, tax expenditures, once adopted, tend to stay in place."

But has the time come for that trend to change? Will the current Congress cut or at least tweak some of these tax expenditures as it struggles to reduce the federal deficit?

A year ago, I would have said no to both possibilities. Now, I'm thinking that tweaks may be in the offing that will make some taxpayers even unhappier than they usually are when they file their tax returns.

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Hmm very interesting point. I'm not really sure how to reduce the deficit. There's so much to be done. A big place to cut budget should be military spending.

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