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Flat Rate Faces Uphill Struggle : Soaring Tax Breaks Peril Reform Plan

March 17, 1985|TOM REDBURN | Times Staff Writer

WASHINGTON — The Senate Finance Committee's recent confirmation hearing for Secretary of the Treasury James A. Baker III was hardly a good omen for tax reform. One by one, committee members weighed in with ringing defenses of such tax breaks as special incentives for oil and gas drillers and tax-free fringe benefits, among many others.

Calling them "incentives for savings investment," Sen. Spark M. Matsunaga (D-Hawaii) urged Baker not only to refrain from tampering with special tax provisions already in place but to create more of them. Were it not for a special tax exemption he pushed through the state Legislature some years ago, Matsunaga added proudly, Hawaii would never have become home to the booming macadamia nut industry.

"That is only at the small state level--the state of Hawaii," he declared. "Just imagine what can happen nationwide."

The Treasury Department has developed a tax reform plan designed to give lower rates to most taxpayers and to balance the lower rates by thinning out the myriad exclusions, credits and deductions in the tax code. That may seem a straightforward and politically appealing idea in a nation increasingly frustrated and irascible because of its complex, and costly, tax system. However, it is already clear that reform will be an uphill proposition at best.

Spurred by the kind of faith Matsunaga displayed in the payoff from all types of tax incentives, members of Congress and the executive branch--including President Reagan--have in recent years helped create a bushel of new tax breaks.

The amount of money saved by individuals and businesses through federal tax breaks mushroomed from $82 billion a decade ago to $322 billion last year and is expected to grow past $500 billion by 1989, according to the congressional Joint Tax Committee.

The use of tax preferences by corporations and individuals has become so widespread that "the zealous pursuit of these advantages has made the tax code resemble a vast leaky bucket, spilling as much revenue as it captures," said economic analyst Michael Barker, editor of the Politics and Markets newsletter.

"For every dollar in personal and corporate income that is taxed, another 90 cents is now sheltered from taxation," Barker said.

The explosion in new tax breaks occurred because "Congress finds it easy to respond to every crisis or problem with a tax incentive," a staff member of the House Ways and Means Committee said. "The energy crisis spawned alternative energy tax credits; high unemployment produced the targeted jobs credit; apartment builders won tax incentives on the rationale that they were needed to make room for new families from the baby boom. And it's politically sexy because you can respond to the problem, yet it looks like it doesn't cost anything."

Nevertheless, tax breaks, in their effect on the federal budget, are no different from any open-ended government spending program in that they provide benefits to various individuals or firms at a cost to the federal government. For that reason, they are sometimes known as "tax expenditures."

Under the Treasury Department reform proposal prepared last year by Donald T. Regan, then Treasury secretary and now White House chief of staff, most tax preferences would be eliminated. For individuals, the goal is fairness: to impose approximately the same federal tax burden on individuals with similar incomes. For businesses, the goal is uniformity: to prevent the search for tax advantages from distorting investment decisions.

Many of the tax breaks now in the code are aimed at promoting particular social or economic goals such as owning a home, giving to charities and investing in business plant and equipment.

65% of Families Own Homes

And many of the tax provisions have achieved their goals. Thanks in large part to the deduction for mortgage interest, for example, about 65% of all families own their own homes. Sen. Bob Packwood (R-Ore.), chairman of the tax-writing Finance Committee, contends that reducing tax preferences for such things as employer-paid health insurance would merely force Congress to substitute more cumbersome government programs in their place.

Tax-free fringe benefits, he said, "substitute for social services that government would otherwise be providing at an infinitely greater cost than we now get them with employers' providing them. . . . The bulk (of congressmen) like the idea of using the tax code for incentives."

Even the White House is recommending several new tax breaks, despite the Treasury proposal to end most existing preferences. President Reagan would provide tuition tax credits for families that send their children to private schools and tax incentives to businesses that locate in depressed areas designated as "enterprise zones."

'Goodies for Friends'

However, critics contend that the use of tax incentives is out of control.

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