Off-radar tax breaks draw new scrutiny
Red ink and a presidential tax-reform panel may put focus on 'tax expenditures.'
By Gail Russell Chaddock | Staff writer of The Christian Science Monitor

WASHINGTON - A little money - $100 million - to help shipping companies buy new vessels; $230 million to encourage drug companies to develop treatments for rare diseases. Half a billion to assist oil and gas exploration. Another half billion to allow ministers to deduct housing allowances from their taxes.

Together, they represent the black hole in the US budget universe.

As Capitol Hill plunges into negotiation over the tightest budget since the Reagan era, there's more than $900 billion in a murky area that's all but invisible in the debate over a proposed $2.57 trillion budget. Economists call them "tax expenditures." Tax breaks are akin to spending but not included formally in the budget process.

Some, such as the home mortgage deduction, enjoy broad popularity. Others, such as tax credits for electricity production from poultry waste or "orphan drug" research (on rare diseases), are obscure. In total, the lost revenues are more than enough to eliminate federal deficits, mop up Medicare, and set Social Security on a more secure path. But these sums - slated to exceed $1 trillion in 2008 - have been effectively off the table in budget discussions for years.

Now, as US lawmakers take up the president's budget this week, that protected status could be in jeopardy, as the nation grapples with a new era of federal red ink and as President Bush encourages discussion of sweeping tax reform.

Indeed, last week some experts urged the president's tax reform commission to take up the issue as part of its mandate.

"The tax system has scores of programs which are not materially different from expenditure programs, and they should get the same sort of attention that one gives expenditure programs," says Joel Slemrod, director of tax policy research at the University of Michigan, who testified before the panel on March 3.