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Tax breaks, congress, and the costs of complexity

Reader Barry Posner wrote yesterday to mention that a tax break for car racing similar to one I'd noted earlier - "Are stadium tax breaks going Federal?" - has been passed by the U.S. Senate. Tracks have been using a 7 year depreciation schedule on their facilities for tax purposes, based on a rule that applies to amusement parks. The bill would cement this practice in law, blunting the IRS' argument that the proper time frame is 15 years. Barry calculates that the quicker depreciation schedule reduces the associated taxes by about 30%.

The bill that contains this provision is a whopper. Its origins lie in a WTO ruling that $5 billion in U.S. export subsidies violate trade agreements. Europe has retaliated with a 7% trade duty on specific products, slated to increase to 17% by next March should the subsidies remain in place. Undoing the subsidy and eliminating the retaliatory tariffs seems worthwhile.

But politics being what it is, the game became one of replacing existing subsidies with new ones. As Jonathan Wiseman wrote in April

Congress's task seemed simple enough: Repeal an illegal $5 billion-a-year export subsidy and replace it with some modest tax breaks to ease the pain on U.S. exporters.

But out of that imperative has emerged one of the most complex, special-interest-riddled corporate tax bills in years, lawmakers, Senate aides and tax lobbyists say. The 930-page epic is packed with $170 billion in tax cuts aimed at cruise-ship operators, foreign dog-race gamblers, NASCAR track owners, bow-and-arrow makers and Oldsmobile dealers, to name a few. There is even a $94 million break for a single hotel in Sioux City, Iowa.

Even one of the tax lobbyists involved in drafting it conceded the bill "has risen to a new level of sleaze."

"I said a few months ago, any lobbyist worth his salt has something in this bill," said the lobbyist, who would only speak candidly on condition of anonymity. "Now you see what I'm talking about."

The tax code is a gordian knot of monstrous proportions due to legislation like this. Here's an estimate of the costs of tax complexity (via Robert Samuelson):

The resulting tax code is so confusing, complex and contradictory that it costs taxpayers (in accounting fees and the value of their time) about $100 billion annually to complete their returns, estimates economist Joel Slemrod of the University of Michigan. In 2003 that roughly equaled the combined spending of the departments of education ($57.4 billion), homeland security ($32 billion) and state ($9.3 billion).

To put things in perspective, $100 billion amounts to about $1000 per household. My household would very much appreciate tax simplification, as would most any other. But it is far easier for Congress to pass laws with tax breaks than to cut the knot and "simplify" matters. Chalk up the $100 billion as one of the costs of democracy.

One final note: the tax mess is not a partisan issue - Tuesday's vote on the bill was 94-5.