Saturday, September 24, 2005

US agency says tax breaks too costly, need review


US agency says tax breaks too costly, need review
By David Lawder

WASHINGTON (Reuters) - Tax breaks such as deductions for home mortgage interest and state and local taxes cost the federal government $728 billion last year and need to be reexamined, the Government Accountability Office said in a new report on Friday.

Comptroller General David Walker, who heads the agency, said the government must look at ways to rein in the growth of so-called tax expenditures if it is to avoid huge fiscal deficit problems in future years.

"We're on an imprudent, unsustainable fiscal path," Walker told a news conference. "The status quo is not an option and we're not going to grow our way out of this problem and the sooner we get started the better."

GAO launched the study to help contribute to federal tax reform debate in Washington that was expected to heat up this autumn. A Bush administration tax panel was scheduled to deliver its recommendations by September 30, but a spokeswoman said that will likely be delayed by at least a month due to Hurricane Katrina.

The GAO study said annual federal revenue losses tripled in real terms from $243 billion in 1974 to $728 billion in 2004. Tax expenditures peaked in 2002 at $783 billion before the full effects of the last recession cycled through the Internal Revenue Service.

For most of the last decade, revenue losses from tax expenditures were greater than the federal government's discretionary spending, the GAO said.

The biggest growth in recent years is the exclusion from income tax of employer-paid health insurance benefits, contributing $102.3 billion or 14 percent of the 2004 lost revenues. Deductability of home mortgage interest -- including second homes -- was the second biggest portion at $61.5 billion or 8.4 percent of the total.

Net exclusion of 401(k) contributions and employer-paid defined pension benefits and earnings together were $94.7 billion while deductability of non-business state and local taxes came to $45.3 billion or 6.1 percent of the total.

Exclusion of interest on state and local tax-exempt bonds cost $26.2 billion in 2004, the ninth largest category at 3.6 percent of the total.

Walker said the retirement of the baby boom generation required huge spending growth and massive structural federal deficits. If nothing is done about the problem, balancing the budget by 2040 would require actions as large as cutting total federal spending by 60 percent or raising federal taxes 2.5 times today's level.

"The time has come to reexamine the base of all major federal spending and tax programs, policies functions and activities. We were already deeply in the hole before Katrina hit and now Rita is off the coast," he said.

The agency, however, is not recommending which areas should be targeted for cuts. Walker said that's for politicians to decide, and it will likely take 20 years to accomplish.

"We're in the fact business, not the policy business, but you need facts to make good policy and quite frankly that doesn't happen enough in this town," Walker said.

A spokesman for the Office of Management and Budget dismissed the report, saying it prescribes de-facto tax increases.

"We do not intend to implement the report. The administration rejects any attempts to address the long term fiscal imbalances with tax increases," said OMB spokesman Alex Conant, spokesman for OMB.