Fighting tax loopholes

Herd how alpacas could derail tax reform?

What do the cute, mild-mannered pets have to do with federal tax policy?

{mosads}Earlier this year, I issued an oversight report entitled “TAX RACKETS: Outlandish Loopholes to Lower Tax Liabilities,” demonstrating how clever accounting allows nearly anything imaginable to become a write-off, including alpacas. To illustrate the point, the report outlined how local and federal tax bills can be sheared by claiming the exotic pets as livestock to turn backyards into barnyards.

That’s when the fur started to fly.

Alpaca owners associations that once brazenly touted the tax fleece as a key selling point of the animals now feigned outrage at the suggestion. The association tried to pull the wool over the eyes of taxpayers by retaining a professional PR consultant and launched a media campaign inundating my office and others with phone calls, social media messages, and letters and photos of alpacas.

If this mere mention of a tax break costing about $10 million annually enjoyed by relatively few elicited such an outmeasured and aggressive response, imagine the backlash to attempts to actually eliminate tax preferences benefiting powerful corporate and special interests to the tune of billions of dollars.

There are more than 200 loopholes buried throughout the tax code that collectively cost $1.23 trillion annually. This exceeds the total amount spent annually by the federal government for all discretionary programs, which includes defense, education, transportation, foreign aid and the environment.

These exemptions increase the bill for the average taxpayer and complicate the tax code, leading most individuals to hire a professional to prepare or buy software to help file their tax returns. More than 74,000 pages in length, no one — not even those in Washington who write the laws or enforce them — truly understands the tax code. But special interests are taking advantage of this confusion by hiring armies of accountants and Washington lobbyists to dodge taxes and cash in on the complexity of the code.

Developers are claiming $8 billion in tax credits every year supposedly to construct low-income housing. But with fewer homes being built and no basic accountability requirements, it is nearly impossible to track how the money is being spent. “IRS and no one else in the federal government really has an idea of what’s going on,” a government auditor admitted in testimony before Congress earlier this summer.

The same may be true for the hundreds of other tax loopholes.

A luxury yacht can qualify as a second home and be eligible for the mortgage interest deduction. Alaskan ship captains can expense costs for whaling as charitable deductions, even though no money goes to charity and whaling is illegal. High rollers can even itemize the cost of gambling trips, including entertainment. Even the cost of losing lottery tickets can be deducted, a scratch-off write-off.

Only the IRS knows who is taking advantage of these loopholes, and the agency cannot even verify that those claiming the tax breaks are eligible.

However, as tax reform begins in earnest on Capitol Hill and some of these loopholes are threatened we certainly will see forces mobilized to protect them. In fact, we could see many who would rather scuttle tax reform and threaten everyday Americans keeping more of their own paycheck than see these loopholes hit the wastebasket where they belong.

I look forward to highlighting some of these loopholes for the waste that they in fact represent and working to ensure that tax reform gets passed even over the objections of Washington’s special interests.

In addition, with an eye toward the future, I plan on introducing the Tax Expenditures Accountability Act, which will require the Treasury Department to disclose the corporate and special interests receiving tax credits.

As the alpaca lobby demonstrated, riding herd on tax breaks will cause every special interest benefiting from the code’s complexity and unfairness to bray. To achieve real reform that reduces tax bills for everyone, however, we cannot be deterred.

Flake is the junior senator from Arizona.