How Dead Citrus Trees Beat Tax Reform Every Time

Here is why tax reform is so hard: In June, House Republicans released their “Better Way” tax plan that would reduce tax rates and eliminate many special interest tax breaks. Tomorrow, the GOP-controlled House Ways & Means Committee will likely report out a series of bills that would create more of the kind of tax subsidies its members decried just three short months ago. The winners: citrus farmers, nuclear power plant operators, irrigation and ditch companies, and Olympic medalists--among others.

In June, House Republicans, led by Speaker Paul Ryan (R-WI) and Ways & Means chair Kevin Brady (R-TX) said this about business tax preferences:

“Today, the tax code is littered with special-interest deductions and credits that are designed to encourage particular business activity. These provisions create incentives for businesses to make decisions because of the tax consequences rather than because of the underlying economics. This tax-motivated shifting of resources causes a misallocation of productive capital and therefore slows economic growth. These special-interest provisions are a source of both complexity and controversy.

Moreover, the proliferation of such provisions adversely affects the public’s confidence in the fairness of the tax system as they can contribute to taxpayers’ believing that everyone but them is getting special tax breaks. Finally, the existence of special-interest provisions reduces revenue and therefore requires growth-stunting higher tax rates on businesses across the board.”

That’s a great description of what’s wrong with such tax subsidies and why Congress should eliminate them. Too bad Brady’s committee is about to ignore its own advice and create a fistful of new ones.

I don’t mean to be picking on only Republicans. When Democrats ran the congressional show, they did exactly the same thing: Talk in lofty terms about the importance of rate-cutting,  loophole-closing tax reform, while busily creating new preferences—or extending old ones.

Why? Because constituents and lobbyists want them.  After all, there are Florida farmers who lost their citrus trees to disease. In a tough election year, their GOP congressman wants to show he can get things done. So the committee helps him out by reporting his bill.

Or, in a burst of faux-patriotism, lawmakers of both parties want to show they are supporting US Olympic athletes.  But they want to do it on the cheap, with a symbolic bill that would mostly benefit rich professionals and do nothing for the vast majority of struggling athletes who could really use help. So they pass a bill that makes cash bonuses paid by the US Olympic Committee (as well as the modest value of medals themselves) tax free. After all, it wouldn’t cost the Treasury much and—unfortunately-- makes for a nice headline.

By contrast, there are few advocates for tax reform.  Sure, there would be lots of support for a bill that cuts tax rates. But one that would take away tax subsidies?  Not so much.

Worse, the unwritten rule in Washington is that even lobbyists whose clients would be unhurt by base-broadening will oppose (or at least not support) those changes.  Like animals that form a tight circle to protect one another from predators, lobbyists also close ranks. After all, if lawmakers can successfully succeed in cutting prey from the herd, who knows who will be next?

Rarely, the circle breaks and the herd makes a run for it, everyone for themselves. That happened in 1986. But it does not happen often.

This environment makes it easy for lawmakers: Given a choice between protecting real constituents and financial contributors or approving rate cuts that do no-one special favors, they choose Door Number One. So, if you like to bet, put your money on those citrus growers every time.