Oversight, Maintenance and Repeal of Tax Breaks: The Case of the Investment Tax Credit

Abstract

Why do some tax breaks survive periods of tax reform or budget-balancing while others are cut back or eliminated? This paper presents the first in a series of qualitative case studies focusing on specific tax preferences that did or did not survive such legislative episodes. Examining the investment tax credit for capital equipment (repealed in the Tax Reform Act of 1986), I argue that tax breaks are eliminated when their policy justification is weak within the context of the specific legislative effort in question. The ITC’s large revenue loss, its uneven distribution, the presence of other tax subsidies for the affected sector, and the negative symbolism of such practices as tax shelters and the leasing of tax credits between companies all made the provision incompatible with a revenue neutral reform effort based on the goals of equity and efficiency. This study demonstrates that broad systematic factors like the distribution of the governing coalition, interest group pressure, economic trends and public opinion do matter to policy durability, but in ways that are conditional on the nature of the policy itself.

Keywords: tax policy, policy durability