[This guest post is by Christopher Prandoni, the Federal Affairs Manager for Americans for Tax Reform. It is a response to Myron Ebell’s May 7 post, “A Response to Conservative Defenders of Tax Credits.”]
Americans for Tax Reform asks every candidate running for Congress to sign the Taxpayer Protection Pledge, a promise to their constituents that they will not raise taxes on Americans or their businesses. The Pledge, signed by 235 Members of the House and 41 Senators, reads:
I___ pledge to the taxpayers of the state
Of___ , and to the American people that I will:
ONE, oppose any and all efforts to increase the marginal income tax
rates for individuals and/or businesses; and
TWO, oppose any net reduction or elimination of deductions and
credits, unless matched dollar for dollar by further reducing tax rates.
The Pledge is by no means a panacea to America’s tax and spending problems, it is a stopgap which identifies tax increases and looks to prevent them. It is the second clause of Pledge that has caused a limited fuss within the conservative movement and, thus, is worth reexamining. Before we proceed, it is important to make the distinction between two types of tax credits—refundable and nonrefundable—as conflating them can lead to unnecessary confusion. A tax credit is employed to reduce a taxpayer’s tax liability, ie reducing the amount of money they must pay to the government. A refundable tax credit allows the taxpayer to reduce their tax liability below zero, meaning the taxpayer is owed money from the government. The outlay effect caused by refundable tax credits is spending. Americans for Tax Reform has unambiguously opposed outlays resulting from refundable credits. I recommend readers take a look here at which refundable credits trigger these outlay effects.
The second type of tax credit, which is much more common, is non-refundable; it cannot reduce a taxpayer’s liability below zero. When conservatives argue for blanket repeal of these credits—or the non-spending portion of refundable credits—they are arguing for higher taxes—repealing these tax policies means more money for Washington’s appropriators. ATR has consistently advocated for the repeal of any number of credits, as long as repeal is offset with identical or greater tax cuts. Offsetting the repeal of energy tax credits and deductions is incredibly easy as most are worth a few billion dollars.
Why is offsetting the repeal of a tax credit, thereby preventing a tax increase, so important? Prohibiting tax hikes draws a line in the sand between supporters of big government and small government. Democrats have no interest in reducing America’s historic spending levels and will only do so when tax hikes are off the table. With the highest corporate tax rate in the world and a high personal income tax rate, raising rates is, thankfully, a heavy lift. Realizing this, Democrats pivoted and are now trying to raise revenue by repealing tax credits and deductions.
Although conservatives are arguing for repeal of particular tax credits and deductions for different reasons—namely market efficiency—they should of wary of supporting the Left’s unambiguous goal—more of your money. Once conservatives begin supporting tax increases through blanket repeal of tax breaks, it becomes enormously more difficult to prevent other tax hikes—like those proposed by the Simpson-Bowles commission, President Obama, and the Gang of Six.
ATR does not universally support or oppose tax credits, which is why we are opposing HR 1380, the New Alternative Transportation to Give Americans Solutions Act. Otherwise known as the Pickens Plan, the NAT GAS Act further obscures America’s already convoluted energy sector. To remedy the overregulation problem in America’s energy market, Congress should be looking to peel back policies that to skew consumer choice, not add additional complexity.