Some call them “tax expenditures,” while others use the more pejorative “tax loopholes.”
Whatever the name, exemptions from taxation are many and costly.
A recent report by the Legislature’s budget analyst, Mac Taylor, says that they reduce state revenues by $55 billion a year.
As noted in this space earlier, the biggest, in terms of financial impact, are broadly applied and probably untouchable. For example, neither legislators nor voters are likely to apply sales taxes to food or prescription drugs, exemptions worth $7.5 billion a year in savings to consumers.
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Exemptions for employer-provided health insurance and pension contributions, Social Security benefits and mortgage interest are equally sacrosanct.
But what about the dozens of much smaller and much narrower loopholes that specific interest groups have persuaded the Legislature to enact? Tax-reform advocates beat the drums constantly for closing them, and many politicians pay lip service to the cause.
However, there is a structural impediment to closing unjustified tax loopholes that are, in effect, gratuitous gifts from the state treasury.
While it takes only a simple majority vote by the Legislature and approval of the governor to create a new loophole, closing one is considered, legally, to be a tax increase and therefore requires a two-thirds legislative vote.
Beyond legalism, however, those who benefit from lucrative loopholes will spend whatever it takes on lobbyists and campaign contributions to maintain them, while there’s no offsetting clout for reform.
The tendency over time, therefore, is for the Capitol to open new loopholes at the behest of their beneficiaries – supposedly for the greater good of the public, of course – and almost never close old ones, even those whose supposed rationales have expired.
This year is no exception. Dozens of bills to create new loopholes – exemptions from taxation, tax credits and taxable income deductions – have been introduced and if enacted, could cost the state treasury additional hundreds of millions, if not billions, of dollars.
Assembly Speaker Toni Atkins, for instance, has two tax expenditure bills on her personal priority list, one a $25 million benefit to small businesses for research and development activities, the second a $50 million tax credit for rehabilitating historic buildings.
Other bills would subsidize actions as diverse as adopting unwanted animals as pets, buying diapers, donating to food banks and contributing to a preschool education fund.
Individually, these and the other activities that would receive new tax benefits appear legitimate, but collectively, they would permanently siphon money from other public purposes.
Before punching more loopholes in the state tax system, the Legislature should close those that are nothing more than giveaways.
Call The Bee’s Dan Walters, (916) 321-1195. Back columns, sacbee.com/dan-walters. Follow him on Twitter @WaltersBee.