January 3, 2013

Competing interests cloud spending picture

Congress has the difficult job of balancing the needs of baby boomers and the nation's young people.

By DAVID LAUTER / Tribune Washington Bureau

 Kevin Harvick
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NASCAR drivers aren’t the only winners at tracks like the one at Watkins Glen, N.Y. A loophole allows track builders to accelerate depreciation. The cost: $43 million a year.

The Associated Press

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By now, we've heard all about the big stuff in the fiscal cliff bill that finally passed on Tuesday.

But Congress also managed to stuff all sorts of corporate tax breaks and other arcane provisions into the bill, covering everything from electric scooters to NASCAR racetracks to taking the subway to work. Most of these tax breaks already existed – they're just being extended again for another year or two, at a total cost of roughly $77 billion.

Here are some of the more curious tax provisions in the fiscal cliff bill:

A $9 billion "sop for Wall Street banks and major multinationals."

Section 322 of the bill allows manufacturers and banks to defer taxes when they engage in a special type of financial transactions known as "active financing." The break costs $9 billion per year, and critics claim it encourages firms to create jobs overseas. But it's a lobbying priority for companies like General Electric and JPMorgan, who say that it helps them compete abroad, and it will get extended another year.

A rum tax for Puerto Rico.

Congress currently levies an excise tax worth $13.50 per gallon on rum produced in or imported to the United States. Most of that money is transferred to Puerto Rico and the Virgin Islands to support their rum industries. In 2009, this tax raised some $547 million. The cliff deal would extend this arrangement another year. (By the way, Puerto Rico's non-voting representative in the House, Pedro Pierluisi, thinks this tax set-up is too favorable to rum distillers.)

Cheaper office space for Goldman Sachs.

Section 328 extends tax-exempt financing for the "Liberty Zone," the area around the former World Trade Center in New York City, for another year. This provision was supposed to help fund reconstruction after 9/11. Yet a recent Bloomberg investigation found the bonds have mostly helped finance new luxury apartments, not to mention the construction of the new Goldman Sachs headquarters.

Help NASCAR build racetracks.

The so-called NASCAR loophole allows anyone who builds a racetrack to receive a small tax benefit through accelerated depreciation. This tax break cost roughly $43 million the past two years and will get extended for another year. Supporters claim the break is necessary so that NASCAR can compete on a level playing field with other theme parks.

Promote plug-in electric scooters.

For years, Congress has been trying to promote electric cars through various tax breaks and subsidies. But what about electric scooters? Section 403 extends a credit for "2- or 3-wheeled plug-in electric vehicles." The New York Observer recently reported that e-bikes are running rampant in New York City, used for everything from Chinese food deliveries to expensive joyrides. Only problem? They're illegal in the state.

Repair the railroads.

Section 306 will extend a hefty tax credit to railroads for maintenance work. Congress originally passed this credit because there was a worry that many of the hundreds of "short line railroads" would abandon their small sections of track, which would fracture the national shipping network. This credit costs about $165 million per year and will survive another year.

Subsidize Hollywood films.

The bill renews "special expensing rules for certain film and television productions," at a cost of some $75 million per year.

Congress has become the butt of late-night comedians for waiting until the last minute to do any work, yet its procrastination involves something more than fecklessness: The issue over which it keeps stumbling not only separates its two parties into warring camps, but divides them internally.

At its core, the debate over the size of government and how to pay for it pits the interests of the huge baby boom generation, now mostly in their 50s and 60s, against the needs of the even larger cohort in their teens and 20s. With limited government money to spend, how much should go to paying medical bills for retirees versus subsidizing college loans, job training and health care for young families with children?

As they grapple with that, the party of small government increasingly relies on the votes of people dependent on entitlement spending. And the party that created the massive government programs for retirees has more and more become the political home of the young.

The part of the debate that ended Tuesday night mostly involved how limited the government's resources would be.

Congress agreed to add about $620 billion to federal revenue over the next decade. But the vote locked in place the Bush-era tax cuts for everyone with incomes below $400,000 a year, a decision that denied the Treasury about $4 trillion over the same period.

That vote did not end the tax debate, but it did settle the biggest part of it. White House officials say that this spring, when the next budget deadline arrives, President Obama will seek several hundred billion dollars more over the next 10 years. But even if he prevails over Republican opposition, the increment would be relatively small.

Increasingly, therefore, the coming fights over the budget will focus on the topic that both sides have shied away from: spending on retirees.

Both parties prefer to focus voters' attention elsewhere. Democrats like to blame the rise in the national debt on the George W. Bush-era tax cuts – 98 percent of which Congress just voted to renew – and the cost of the wars in Iraq and Afghanistan. Republicans like to point to Obama's economic stimulus efforts.

Each of those policies has contributed to the debt, but only to a limited degree. The real driver behind the government's long-term debt problem comes from the huge number of people entering retirement.

Over the last 40 years, the federal government has spent, on average, about 18.5 percent of the U.S. gross domestic product – the overall output of the economy. At the current rate of increase, Social Security and Medicare alone would equal 16 percent of the economy by the time the number of retirees stops growing, about 25 years from now, the Congressional Budget Office projects. Most of the increase would come from the cost of health care.

Obama acknowledged that problem when he spoke Tuesday night.

"The aging population and the rising cost of health care makes Medicare the biggest contributor to our deficit," he said. "I believe we've got to find ways to reform that program without hurting seniors who count on it to survive."

That's a more straightforward acknowledgment of the problem than political figures typically offer. Liberal Democrats typically prefer to talk about taxes, not spending. Republican congressional leaders tend to do what House Speaker John A. Boehner, R-Ohio, did in his statement Tuesday night: avoid naming any specific programs and instead use euphemisms.

He said he would push for "significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt."

The coy comments from both sides underscored the conflicts between their positions and their most potent supporters.

Democrats have long championed the government's social safety net. Medicare, passed under Lyndon B. Johnson, and Social Security, under Franklin D. Roosevelt, stand as two of the party's proudest policy achievements.

Yet Democrats' strongest support now comes from younger voters. Obama in particular has focused on the needs of that constituency, and he has shown more willingness than many in his party to consider trimming the cost of retirement programs. On Tuesday night, as he talked about the cost of Medicare, he repeated his call for government to spend more on "rebuilding our roads and bridges and providing investments in areas like education and job training" – the spending preferences of the young.

In December, during his negotiations with Boehner, Obama offered a shift in how the government calculates cost-of-living adjustments. That technical-sounding move would reduce the deficit by about $220 billion over a decade, in large part by slowing the growth of Social Security payments.

The idea drew howls of protest from some liberals, highlighting divisions likely to surface again.

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