JCT

The Joint Committee on Taxation of the US Congress has gradually posted many of its publications going back as early as 1926.  Special tax rules for natural resources were a focus of JCT's attention even in its earliest days.  By the mid-1920s, standard cost depletion had already been jettisoned for discovery value.  Under cost depletion, taxpayers could write off what they'd invested in the mining property.  Discovery value depletion introduced subsidization, as it allowed the write off of the value of minerals at the time of discovery, even if that value was more than the investment (as it normally would be, else the mine would be losing money).  The discovery approach proved difficult to implement because the minable reserves couldn't always be assessed ahead of time, so the tax code shifted to percentage depletion, allowing 27.5% of the gross value of oil and gas to be written off from taxes each year.  JCT was concerned about this from the outset:

The text below has a refreshing honesty, particularly in comparison to the bland bureaucratic language that pervades government documents today.  The note to the in-process study reads:

The 1926 act in regard to depletion on oil and gas wells includes a radical change from the 1924 act, consisting of the substitution of an arbitary 27 1/2 per cent of gross income for a depletion deduction in lieu of the depletion, on discovery value previously allowed.  It is most important to study the effect of this change as it was made on insufficient data.

JCT 1926 OG pct depletion study

 

 

 

 

 

 

 

 

Rates are lower, and the largest of oil firms can no longer claim the subsidy.  But the 1926 study, and however many more followed it, have never been sufficient to kill this tax break entirely.  It remains a significant subsidy to oil and gas today.

The cover page of the JCT report is below.  It can be read in full here.

 

Earth Track Blog Post

Improved visibility on tax expenditures was one of my biggest hopes for Pew's Subsidyscope when I joined the advisory board, so I am very happy to see the first step of this launched.  Have a look at it here.  With an aggregate value of more than $1 trillion in 2009 (see page 12), it is high time to focus more attention and resources to establish better transparency and accountability in this area. 

Yes, I know the arguments about tax breaks:  "What's the matter with just letting people keep more of their own money?"  Nothing, of course, if we take the question on a metaphysical level.  But the real world is one where all of us use government services, and reductions in taxes to one group must be made up by higher taxes on another.  As a result,  who gets the special deals, and how much cash they save through those special deals, matter a whole lot both in terms of fairness and for the long-term competitiveness of our economy.  After all, the biggest subsidies of any form generally go to the most politically powerful existing industries, not to the as-yet-undefined, struggling to survive start-ups on which the long-term growth of our economy often relies. 

Estimating tax expenditures is not an easy task, and both JCT and Treasury have relatively small staffs to do it.  With revenue losses so high though, this is not a valid excuse.  Maybe we need more people, better data systems, and unique tax break identification numbers so we can more easily track usage of each tax break so we can do the job better.  Maybe large tax breaks need to be analyzed with the same rigor as we require for new regulations.

What Pew has done here is admittedly a relatively small step.  They have centralized data on tax breaks done by two federal institutions, the US Treasury and the Joint Committee on Taxation, in one place, allowing citizens to easily compare estimates for the same line item for the first time.  This should have been done years ago by the institutions themselves, rather than requiring investments of Foundation money.  But even this small step is a very important one.  It allows questions to be easily asked that were more difficult to ask before.  And asking those questions can help to move us along in the proper direction of treating our investments in tax reductions to selected groups as real money that needs to have real oversight and to be killed if better returns for taxpayers are available through other means. 

Where JCT and Treasury numbers in the Pew database are very different, it would be helpful for the respective estimation groups to jointly produce a one page summary on why.  This can be called a "Tax Expenditure Variance Report," and should be mandated by Congress any time the annual estimates differ from each other by $100 million or more. 

Other changes I think need to happen in this area:

  • Both Treasury and JCT should, as a matter of course, issue their estimates in electronic formats that can be easily imported into software programs such as Excel for further evaluation.  These data sets should be populated as far back as the two organizations have data; and should adjust for name changes where the basic subsidy has remained to allow for a proper time series.
  • Tax expenditure estimates that cut across multiple sectors (accelerated depreciation, for example) should be broken out by industry sector.  The rules are not always identical in each one, and it is important to be able to gauge the relative distribution of these benefits.
  • Meta data on institutional structures that bypass corporate taxation entirely should be distilled into summary tables that a general user can understand.  This would help to capture the differential use of pass-through vehicles (LLCs, PTPs, MLPs, etc.) and corporate inversions across industrial sectors that can generate quite different tax burdens on different ways to supply similar goods and services. 
  • Meta data on average effective tax rates by industry should also be produced annually by government.  Where this has been generated in the past, it has usually been by NGOs using far more limited information on taxes paid than what the government itself posesses.
  • A formal process to compare forward-looking estimates with actual losses incurred under each tax expenditure should be instituted, again with publicly-available variance reports that describe inaccuracies that exceed $100 million per line item.
  • While the organizations don't want to release their estimation models to prevent gaming by industry and legislators, some use of outside review should be instituted, especially if the variance between projected revenue losses and actual are quite large.
  • Pew and others need to continue to expand their coverage to be sure that sectoral comparisons of aggregate tax breaks are accurate.  For example, the current version of the database excludes excise tax breaks, which for ethanol are approaching $6 billion per year and would generate a big jump in the aggregate tax breaks for energy.  Tracking of tax breaks should be as comprehensive as possible over time if it is to inform decision making in a neutral way.