Memo to Dems: About Those Earmarks
Remember the bridge to nowhere? Of course you do. In 2005, Alaska Senator Ted Stevens inserted the $320 million project connecting a tiny Alaska town to an island with fifty inhabitants into a transportation bill and nearly instantly it ascended into the rarified company of $640 Pentagon toilets as an iconic image of government pork at its worst. The bridge became a symbol of the venality of a Republican Congress that had overseen an almost four-fold increase in earmarks between 1994 and 2005, and it provided a rare moment of bi-partisan unity as both the liberal and conservative blogs rushed to cry foul.
Now that Democrats control Congress, reforming out-of-control earmarks is a top priority. Indeed, in late December, incoming House Appropriations Committee Chairman David Obey and his Senate counterpart Robert Byrd announced they wouldn't be funding their colleagues' pet projects left on the table by the previous Republican Congress. But while appropriations earmarks are receiving justifiable attention, another side of the story has gone largely ignored: targeted tax breaks that function almost exactly like earmarks. In 2005, the total cost of appropriations pork projects was somewhere around $64 billion, while narrowly targeted tax expenditures cost, in the estimation of tax expert Leonard Burman of the Urban Institute somewhere between $100 billion to $200 billion. "Everything you can find on the spending side, you can find in the tax code," says Burman. If the Democrats are going to reform the earmark system they've got to look at both sides of the ledger.
It's important to keep earmarks of any kind in perspective. If you read blogs and listen to the elected officials, you would think that earmarks are responsible for the current deficit. They're not. The $64 billion appropriated for pet Congressional projects is about the cost of eight months of the Iraq occupation. Outrage from libertarians and so-called fiscal conservatives aside, the problem with earmarks and pork isn't so much the total cost as the fact that the pork bypasses the normal budget process, whereby projects are vetted for merit, and the potential for abuse. If lawmakers can anonymously slip millions of dollars of taxpayer money for a pet project, as they have done of late, there's little to stop them from providing a neat quid-pro-quo service, as convicted felon and former congressman Duke Cunningham did with his defense contractor benefactors. But if the issue is corruption, the more buried the quo, the less likely the quid will raise red flags. It's hard to hide a $300 million bridge. It's a lot easier to hide a $300 million tax break. And whereas even small community groups can hope to get some local pork for a Social Security office or an after-school center those with the most incentive and ability to secure tax earmarks are those with the largest tax liabilities and enough tax attorneys to understand what's at stake in the code: big corporations and industry trade groups.
That's part of the reason so called "tax earmarks"--tax breaks inserted for the specific benefit of a given industry or group of parties--are such a problem. Take the 2004 American Jobs Creation Act, a name so aggressively anodyne, it should, of course, set off alarm bills. The bill was written ostensibly to correct a system of trade subsidies that had been ruled illegal by the WTO, but it quickly became, in the words of one congressional aide "a Christmas tree." While technically revenue neutral, the bill spread around tax breaks to all sorts of industries, from bow and arrow manufacturers to basketball makers to Starbucks, which successfully lobbied to get coffee roasting classified as a manufacturing activity, allowing it to qualify for large tax subisides.
The American Jobs Creation Act is just one example, but every year the omnibus budget bill is chock full of similar giveaways. Each budget includes an itemized list of "tax expenditures," some of which are broadly applied, like the mortgage deduction, or the deduction for employee payments of health insurance, and some of which are not. In the most recent budget these included: "Special rules for certain film and TV production," "Tax credit for certain expenditures for maintaining railroad tracks," and an "Enhanced oil recovery credit."
For politicians, tax credits are a way of spending the government's money, while using the appealing rhetoric of tax cuts. The more tax credits in general proliferate, the harder it is to spot the pork. So how much do tax breaks for special interests cost? It's surprisingly hard to say. As it is on the spending side, pork is often in the eye of the beholder. "If you provide a credit for solar energy there's only a few companies that make solar cells," a Ways and Means staffer told me. But since there's a clear policy goal behind such a credit, should that be considered pork? "It's kind of like the Supreme Court's definition of obscenity," says Burman. "You know it when you see it."
Not surprisingly, the GOP-controlled Congress never quite got around to tackling these questions. Indeed, not only did the Republicans' proposed earmark reform manage to leave tax expenditure earmarks almost entirely untouched, in a kind of meta-loophole, it actually would have made things worse. "Right now a tax earmark is defined as a special treatment for 100 or fewer persons," Obey pointed out on the floor of Congress in September. "This bill says the only time it is going to be counted as a tax earmark is if it affects one entity. That means if you have a huge tax break for two multinational oil companies it isn't even covered in this package." Groups like Citizens for Tax Justice and the Center on Budget and Policy Priorities condemned the proposal for the same reason.
So what will reform look like in the Democratic Congress? Unclear. Those on the Appropriations Committee are reluctant to reform the earmarks they oversee without some complementary move on the Ways and Means side. But as of now, the Ways and Means Committee isn't considering specific tax earmarks reforms, preferring instead to set its sights on a more comprehensive approach to reforming a tax code that almost everyone agrees is broken. It's clear there are some turf issues to resolve. Talk to people in Appropriations and they point out the massive expense of tax expenditures, but talk to those in Ways and Means they are likely to downplay the degree to which tax breaks are specially tailored.
It will be interesting to watch the issue play out as corporations that had shunned Democrats under the influence of the infamous K Street Project now attempt to get back in their good graces. There will be a strong temptation for Democrats to use the tax code, as Republicans did, as a means of paying back big donors outside of the public scrutiny that has begun to fall on appropriations earmarks. "When Democrats propose a new spending program, they get hammered," says Burman. "When they propose a tax credit then they are playing the Republicans game. That's just giving people back their money. They've been just as prone."