With Tax Day approaching on April 18 and Congress considering tax reform, Senator Jeff Flake (R-AZ) has released an oversight report, Tax Rackets: Outlandish Loopholes to Lower Tax Liabilities, where he highlights seven tax loopholes. This report is another installment in a series that tackles wasteful government spending.
As the report states:
“[The] U.S. has the highest corporate tax rate in the world. Yet, many corporations have not paid any federal income taxes for years. This is a result of loopholes, giveaways, write-offs, and other provisions of the code, known as tax expenditures.”
The loopholes that Flake’s report points out are not nearly as big as the large tax expenditures in the code but still represent lost revenue. Below are four tax expenditures Flake highlights:
- Alpaca Tax Fleece — Some individuals are buying alpacas and expensing the cost to reduce or eliminate their income tax bills. Individuals buying alpacas for tax breaks often board the animals with the sellers; when they do not, they can claim a home with a small backyard as a farm and reduce their property tax bill as well. As a result, these animals are increasingly advertised and sold as walking tax shelters.
Flake released a video asking viewers to help “an innocent alpaca, who is being used as a tax shelter”:
- Chicken Poop Tax Credit — Energy produced by burning chicken waste and other organic waste is eligible for federal tax credits that cost taxpayers about $200 million annually.
- Lucky Loophole — The tax code permits gamblers to deduct gambling losses up to the amount of income earned from gambling. “Professional gamblers” can deduct gambling losses that are greater than their winnings as well as the costs of their gambling trips, including meals and entertainment. The generous deduction for gambling losses has, for example, led people to buy losing lottery tickets to take advantage of the tax write-off.
- Treasure Island Tax Haven — American citizens that relocate to Puerto Rico can avoid paying federal taxes on their salary and can reduce or even eliminate the federal and local income tax on their dividends, interest, and capital gains. In addition, the Puerto Rican government charges an excise tax on U.S. companies with the knowledge that those companies will get a credit from the U.S. government for those taxes; in essence, Puerto Rico raises revenue through the U.S. Treasury. Furthermore, the income earned from Puerto Rican municipal bonds is not subject to taxation, providing another tax haven.
We support Flake’s efforts to shine a spotlight on these tax provisions, even if they would be a very small part of the overall solution. These loopholes pale in comparison to the total amount of tax expenditures built in our tax code that cost nearly $1.6 trillion in forgone revenues in 2017.
Reducing and reforming tax expenditures would allow for comprehensive tax reform that broadens the tax base, lowers tax rates, grows the economy, and reduces deficits.