Coburn, Norquist Dispute Ethanol Tax Credit Repeal

April 27, 2011

U.S. Senator Tom Coburn (R-OK) and Grover Norquist, the President of Americans for Tax Reform (ATR), have engaged in a public dispute in recent weeks over whether repeal of a tax credit without accompanying it with a tax reduction elsewhere is good policy. The issue in particular is Coburn's proposal to eliminate $5 billion in federal tax credits provided to ethanol producers.

Coburn has taken Norquist's Taxpayer Protection Pledge, which his organization is highly successful at getting Republican (and some Democratic) officeholders to take. The pledge asks candidates for public office to (1) oppose tax rate increases and (2) oppose the elimination of deductions and credits unless offset by other revenue reductions. Aside from his support for eliminating the ethanol tax credit, Coburn has also supported efforts to eliminate other tax deductions and credits designed to distort individual decisions, such as the employer-based health insurance deduction. Coburn was also a member of the President's Deficit Commission, which produced a plan that broadened the tax base and lowered rates, but increased revenues.

Coburn (to Norquist) on his proposal to repeal the ethanol tax credit:

By opposing my amendment, you are defending wasteful spending and a de facto tax increase on every American. Ethanol subsidies are a spending program placed in the tax code that increases the burden of government, keeps tax rates artificially high, and forces consumers to pay more for food and energy.... Continuing to issue blanket defenses of all tax expenditures is a profoundly misguided embrace of progressive, activist government and a strategy for tax complexity, tax deferment, excessive spending and unsustainable deficits.

The Wall Street Journal then weighed in, to note that revenue is not the only factor that should be considered:

We understand the larger principle that Americans for Tax Reform is trying to defend. Axing every credit, exemption and deduction in the tax code, while leaving tax rates high, would result in a higher general tax burden and more money for Washington to spend. A true tax reform would trade such tax loopholes and subsidies for lower rates.

But the compelling taxpayer interest in this case is to begin to dismantle the failed policy that is driving up the cost of food and fuel with no benefit for the environment or U.S. energy security. 

A Norquist spokesperson responded:

ATR opposes the ethanol tax credit and wants it permanently repealed. It is bad energy policy and bad tax policy. There are two ways to repeal any tax deduction or credit one dislikes: raise net taxes (as Sen. Tom Coburn proposes), or cut other taxes by at least as much.

On Meet the Press this past weekend, Coburn shot back:

I think if you go back and look at the commission's report, what we were talking about is getting significant dynamic effects by taking away tax credits, lowering the tax rate and having an economic increase that will actually increase the revenues to the federal government.... I think which pledge is most important, David, is the pledge to, to uphold your oath to the Constitution of the United States or a pledge from a special interest group who, who claims to speak for all of American conservatives when, when in fact they really don't.

Norquist responded in Politico:

Coburn said on national TV today that he lied his way into office and will vote to raise taxes if he damn well feels like it, never mind what he promised the citizens of Oklahoma. Sen. Coburn knows perfectly well that the pledge is not to any organization but to the citizens of his state. He lied to them, not to Americans for Tax Reform.

So while Norquist agrees with Coburn that the ethanol tax credit is bad energy policy and bad tax policy, he actively opposes its repeal unless done in a way that reduces government revenues. But revenues are just one point of reference, and a troublesome one given that they'll go up soon on autopilot as the economy recovers (federal revenues are at 14.4% of Gross Domestic Product this year, below the recent historical average of 18-19%). One must look not only at revenue but also at compliance costs, distortions to individual decisions, and distortions to the overall economy. If the repeal of a special-interest tax break reduces those costs in excess of the revenue, it's a net positive move. (I participated in a friendly debate on this topic with ATR's Ryan Ellis on Tax Day 2009, where we took opposite sides on that question; my comments are about 18 minutes in.)

I should note that it's an open secret that what's going on here is an example of the Overton window. By being so insistent on preserving even deductions and credits that even he admits do serious economic harm and involve enormous government micromanaging, Norquist's goal (I hope) is not to preserve unjustifiable tax credits but to ensure that any final deficit deal is as favorable to the low-tax position as possible. But at some point, that means he should not insist on the perfect at the expense of the good.

The Washington Examiner offered its advice to ATR in an editorial yesterday:

[W]hy has ATR succeeded at keeping rates low but unsuccessful at the rest of its mission? The problem comes not from the promises in the pledge, but from the promise left out. At the federal level, pledge signatories promise to: 1) oppose all marginal tax increases, and 2) oppose any elimination of tax credits unless matched by reduced taxes elsewhere.

The promises not to increase net tax rates are great, but where is the promise to oppose any new deductions or credits to the tax code? Raising rates is not the only way government can "control one's life" through taxes. Credits for electric cars, solar panels, and first-time home buyers all use government power to influence citizen behavior. How are they any morally different than higher income tax rates? Worse, without a credit/deduction opposition plank, the pledge actually undermines real tax reform.

Sooner or later—sooner I think—we as a country will need to decide where tax revenues should be, whether we insist on keeping them where they are or lower or we have them ratcheted up. The next question after that is how to raise that money while minimizing distortions to individual decisions and deadweight loss to the economy. Tax reform means addressing both questions, not just the first.

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