More Reasons Why Fixing the Debt Crisis Is Hard

The drumbeat of worry is growing as the US approaches the fiscal cliff, when the Bush tax cuts and Obama payroll tax cuts expire and automatic spending cuts kick in just as Congress debates extending the debt ceiling yet again.

If that all hits the fan at once, it could cause a 3.5-4% drop in GDP, an instantaneous recession, and few expect the current Congress to tackle these issues until the very last minute.

Meanwhile, a group of so-called “moderate” senators—Republicans and Democrats who actually work together—are looking for ways to forestall Armageddon. Their efforts are said to parallel the work of the so-called Gang of Six, the Simpson-Bowles deficit commission, and other Serious Efforts that went nowhere in the past.

Supposedly everyone agrees there must be some combination of spending cuts, revenue increases, and broad-based tax and entitlement reform to get a handle on our debt problem before it engulfs us.

But forget Grover Norquist, the Club for Growth, or Tea Party primary voters; real change is hard in Washington because elected officials never want to step on the toes of powerful interests, even on issues that seem trivial.

A New York Times story this week perfectly captured that. It dealt with a minor tax deduction that conservative Republican and fiscal hawk Sen. Mike Crapo, one of the Gang of Six, carved out mainly for a single company in his native Idaho.

Sen. Crapo allowed “’black liquor,’ an alcoholic sludge used as fuel in timber mills and qualify for an energy subsidy created to wean the country off imported oil for vehicles, which black liquor doesn’t do.” The deduction, The Times reported, is worth $3 billion.

Sen. Mike Crapo speaks to reporters about Simpson-Bowles debt commission in late 2010.Photo: Flickr Creative Commons/Talk Radio News Service.

Call it pork or earmarks or whatever. But this is the stuff in which Congress has trafficked since the dawn of the Republic. And it’s peanuts compared with the kind of tax deductions oil drillers and ethanol producers get.

But if it’s so hard to get rid of a penny ante loophole  like this, what would happen if Congress really took on the big ones, like, say, the mortgage interest deduction? Here’s what the Times wrote:

Federal tax receipts are reduced by more than $1 trillion a year by various tax deductions and credits, known as tax expenditures, often tied to a policy aim. Ending them would nearly eliminate the federal deficit, which is projected to be $1.2 trillion in the current fiscal year.

But the three largest are as popular as they are expensive: the mortgage interest deduction has cost about $75 billion a year recently, the employer deduction for health care has cost $120 billion a year, and the charitable-giving deduction has cost $38 billion a year, according to the bipartisan Joint Committee on Taxation.

So, the only hope appears to be an all-or-nothing strategy, forged in a crisis or an emergency—like the fiscal cliff?

Members of the Gang of Six, including Mr. Crapo, see a cautionary tale: Go big or don’t go at all. Little provisions can be picked off by members in ways that a comprehensive deficit reduction cannot, they say.

Sounds good in theory, but we’ve seen this movie before and the ending always has been the same. Why? Because for things to really change, you need a majority of  politicians to act like statesmen, and can anyone remember the last time that happened?

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