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Loophole? Part 2

Dan Walters writes a column in the Sacramento Bee that clearly articulates the semantic problem with the term “tax loopholes” in the current budget discussions:

There’s no precise definition of the term “tax loophole.” It is, like beauty, in the eye of the beholder or, as the late Supreme Court Justice Potter Stewart once opined about pornography, “I know it when I see it.”

A broad definition would be that a loophole – or “tax expenditure,” as the taxation professionals call it – is an exemption from an otherwise widely imposed tax that benefits a particular class of taxpayers. That said, one person’s loophole is another person’s legitimate tax incentive policy, and we are beginning to see a debate along those lines.

He goes on to explain that the more narrow the target audience for a tax reduction, the more difficult it becomes to make the argument for its benefits:

Some loopholes – the biggest ones, generally – have fairly broad benefits and political popularity, such as the income tax deduction on home mortgage interest ($5.7 billion a year) or the sales tax exemption for food ($3.8 billion). But once you get past the biggies – something that has a revenue effect of a billion-plus dollars a year – you find a confusing array of loopholes.

We’ve heard very little about another sales tax loophole that costs the treasury more than twice as much and is, if anything, even more difficult to justify than the yacht loophole – tax-free treatment of custom computer software programs typically purchased by business. While ordinary consumers must pay sales taxes on their off-the-shelf software purchases, the custom programs to manage payroll or inventory are exempt simply because long-time Democratic legislator John Vasconcellos carried exemption legislation a couple of decades ago at the behest of Silicon Valley software firms.

It’s simply ludicrous to contend, as many Republicans do, that all are justified, or are at least more important than spending cuts that otherwise would be needed, just as Democrats shouldn’t defend all spending.

A rational approach would begin with eliminating not only nonessential spending but nonsensical tax loopholes as well.

Also in the Bee is an interesting article about the cooperation of publicly funded groups banding together to fight off budget cuts:

Rather than point the state budget ax at each other, a broad spectrum of interest groups has joined forces in a battle to press Gov. Arnold Schwarzenegger and lawmakers to raise taxes.

Groups representing nearly every state general fund service – education, labor, public safety, environment, health care and social services – have formed an alliance to oppose the governor’s proposal for 10 percent across-the-board cuts.

While a budget cut to education, for example, may result in less money available for schools, a tax increase would have the same effect on families and employers.  So it all just depends on where you’re coming from.

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