Committee for a Responsible Federal Budget

The Senate Democrats' List of Tax Breaks to Axe

Nov 8, 2013 | Taxes

It has been one week since the budget conference committee's first meeting, and many are speculating that the committee could realistically come up with a plan to replace some of the sequester's temporary cuts with permanent deficit reduction. The budget conference committee has a December 13 deadline to produce a compromise budget. The day of the first meeting, Senate Democrats proposed a list with 12 proposed "tax loopholes" to close along with "responsible spending cuts." The list would raise approximately $264 billion over the next ten years, enough money to offset replacing the sequester for roughly the next two-and-a-half years, or to replace more than 25 percent of the sequester over the next ten years. If these provisions were paired with an equivalent amount of spending reductions, it would equal half of the sequester.

The list included three tax provisions affecting multinational companies proposed by Senator Carl Levin (D-MI). The largest would eliminate the "check the box" provision, which allows multinationals to escape taxation of some of their overseas subsidiaries by taking advantages in the differences between U.S. tax law and that in other countries. The second would limit a company's ability to deduct the interest paid on money borrowed to invest overseas. Another policy would also treat a company that is based in the United States, but has a "tax headquarters" located in another country as a U.S. company. Finally, the Senate Democrats would eliminate the deduction for business moving expenses when those expenses move a business overseas.

The list also included several options that would affect stock options and capital gains: limiting a company's ability to deduct large stock options given to its employees, taxing the "carried interest" received by hedge fund managers as ordinary income rather than capital gains, and reducing incentives to swap derivatives into different forms by taxing them all under the same rules.

The list would also end the ability to deduct mortgage interest on a second home or yacht, close the "John Edwards" loophole that lets self-employed people avoid payroll taxes by setting their own salary, and eliminate the accelerated depreciation schedule for corporate jets. Finally, the Senate Democrats' list incorporates a few more changes proposed in the President's Budget, ending tax benefits for tax-preferred retirement accounts that grow above $3.4 million, and changing the rules on inherited retirement accounts and estate tax trusts.

Senate Democrats' Proposed Policies
PolicySavings (2014-2023)
Eliminate “Check-the-Box”$80 billion
Defer Interest Deductions Related to Foreign Income$50 billion
Limit Corporate Deductions for Excessive Executive Stock Options$50 billion
Close the Carried Interest Tax Break$17 billion
Tax Derivative Contracts on a “Mark-to-Market” Basis$16 billion
Eliminate Mortgage Interest Deduction for Yachts and Second Homes$15 billion
End the "John Edwards/Newt Gingrich" Loophole$12 billion
Limit Tax Benefit for Large Retirement Accounts$10 billion
Treat Companies Managed and Controlled in the U.S. as U.S. Companies$7 billion
Close the Corporate Jet Loophole$4 billion
Close Estate Tax Loopholes$3 billion
End Moving Expense Deduction for Shipping Jobs Overseas$0.2 billion
Total
$264 billion


 

If the conference committee comes to an agreement that, for instance, eliminates the sequester for two years (costing $210 billion) and repeals the same amount in tax expenditures, the official budget score would be zero, but the actual budget picture will be much improved for two reasons. First, Congress may not actually allow the full sequester to take place in future years, so its uncertain savings will be replaced by a concrete amount of new savings. Second, the replaced part of the sequester is temporary and would only save money for a few years, but it would be replaced by permanent savings that continue even after the sequester expires.

The budget conference will need to reach a bipartisan agreement, ideally to replace some of the sequester with responsible, targeted savings, at the least. Senate Democrats have put forward a proposal to generate new revenue by closing loopholes (some of which might be acceptable to Republicans). The more options that on are the table, the more likely that the conference committee will have a substantive agreement.