Dumbest Tax Loophole, or Most Self-Serving Loophole?

Dan Mitchell

April 22

When asked about tax loopholes, my first reaction is to determine whether something is an actual tax preference or merely a mitigation of a tax penalty.

And that means understanding the "tax base."

For instance, IRAs and 401(k)s are not loopholes. They are a way for taxpayers to protect their savings from double taxation. Similarly, the "preferential" tax rates for dividends and capital gains reduce (but sadly don't eliminate) the burden of double taxation.

But there are genuine loopholes, meaning types of income that totally escape tax. And some of which are very bad policy.

The exemption for muni-bond interest (the interest paid to people who lend money to state and local government).
The exclusion for employer-provided health benefits (which is a major cause of the third-party-payer problem in the health sector).
The deduction for state and local tax payments (which fortunately was limited thanks to the 2017 Tax Cut and Jobs Act).

There are also loopholes that are misguided, but too small to do much economic damage.

Some of them are downright weird, such as the tax break for brothels in Nevada. Or the tax deduction for sex change operations.

Today, let's examine a different strange loophole. As reported by Politico's Joseph Spector, New York politicians are creating a special tax break for journalists.

The state budget, set to be finalized Saturday, includes the nation's first payroll tax credit for local news organizations in a bid to encourage new hiring... Lawmakers and independent media companies praised the tax break, which will designate $30 million a year to the program, called the Local Journalism Sustainability Act. ...New York spends more than $8 billion a year on tax incentives and grants to attract and retain businesses in the high-tax state, and advocates of the measure have for years sought to extend the largesse to the newspaper and local TV industry. The late addition to the $237 billion budget allows eligible outlets to receive a 50 percent refundable credit for the first $50,000 of a journalist's salary, up to a total of $300,000 per outlet. ...The money is largely focused on independently owned publications, but also can cover hiring journalists in print media outlets that "demonstrate a reduction in circulation or in the number of full-time equivalent employees of at least 20 percent over the previous five years."

There are three things to understand about this proposal.

First, a "refundable credit" is actually government spending. So the new law would be a direct handout for media companies.
Second, it should be obvious why New York's Democrats want to subsidize a sector that acts as cheerleaders for big government.
Third, the law is written in a way that big media firms like the New York Times theoretically could benefit.

All told, not a good idea. And not what I had in mind when I asked what should be done about media bias.

P.S. If you want to know the best way of dealing with tax loopholes (properly defined), click here and here.