Earlier this month, Sen. Evan Bayh (D-IN) said that he agreed with Rep. Eric Cantor’s (R-VA) assertion that all of the Bush tax cuts should be extended, even those for the richest two percent of Americans. The Obama administration has proposed retaining the cuts for the lower- and middle-class while allowing those for the rich to expire on schedule at the end of the year.

Yesterday, Sen. Kent Conrad (D-ND), the chairman of the Senate Budget Committee, called for a temporary extension of all the cuts, including those for the wealthy, adding that “he thinks waiving so-called pay-go rules to extend the upper income rates should be considered”:

“Pay-go is not just a line in the sand,” he said. “There is a reason that you have a pay-go waiver, which requires 60 votes.”

Today, Conrad clarified that he is by no means endorsing the Republican line on a deficit-financed permanent extension of all the Bush tax cuts, saying that “the Republicans’ proposal to me is a formula for the decline of the United States.” His position is that the tax cuts for the rich should only be extended for 18-24 months, “until the recovery is on more solid ground.”

While Conrad’s position is far more nuanced than that of the Republicans, extending the Bush tax cuts is still one of the least stimulative steps that policymakers can take to boost the economy, generating just 29 cents of economic activity for every dollar spent (since the benefits overwhelmingly go to the wealthy, who are far more likely to save a dollar received than is someone from the lower- or middle-class). Extending all of the cuts for two years would cost $558 billion, including debt service costs, according to the Pew Fiscal Analysis Initiative.

Today, when asked if Democratic leaders are willing to consider extending all of the Bush tax cuts, Speaker of the House Nancy Pelosi (D-CA) said, “No. Our position has been that we support middle-income tax cuts.” Treasury Secretary Timothy Geithner also reiterated the administration’s position today:

Mr. Geithner said there is “still some uncertainty about how strong the recovery is going to be,” which may be impacting spending decisions by businesses and individuals. But he discounted that as a reason to extend the Bush-era tax cuts for top earners, saying most private forecasts show moderate economic growth and increasing public confidence in the recovery.

Yesterday, Sen. Ben Nelson (D-NE) “said through a spokesman that he also supported extending all the expiring tax cuts for now, adding that he wanted to offset the impact on federal deficits as much as possible.”

Our guest blogger is Sima Gandhi, a Senior Policy Analyst at the Center for American Progress Action Fund.

For years, right-wing lobbyist Grover Norquist has pressured candidates to sign a pledge promising never to repeal expensive tax subsidies for oil companies and other special interests, and hundreds of elected officials have, sadly, complied.  Earlier this week, however, Norquist lost a major ally in his quest to protect hundreds of billions of dollars worth of special tax expenditures—President Ronald Reagan’s chief economist.

In a Wall Street Journal op-ed this week, conservative economist Martin Feldstein writes that “[w]hen it comes to spending cuts, Congress is looking in the wrong place.” Instead of looking at direct spending programs, he argues that “If Congress is serious about cutting government spending, it has to go after [tax expenditures].”

Indeed, if the government cut all of its $1.2 trillion in tax expenditure spending—the special credits, deductions, and preferential rates that deliver subsidies to certain individuals and corporations—it would raise nearly enough to pay off this year’s estimated $1.5 trillion deficit. Or it could use the savings to cut tax rates by over 40 percent.

So Feldstein is right that Congress could massively slash the deficit simply by cutting off big industry’s tax subsidies—tax expenditures amount to nearly 25 percent of total government spending.  Unfortunately, he also correctly observes that there are political barriers to doing so:

Democrats are reluctant to cut such programs, because once built into the tax law they don’t have to be reauthorized each year, but remain on the books unless they are repealed… Democrats can thus cleverly avoid the traditional accusation of being the party of “tax and spend.” Republicans also are reluctant to cut these tax perks, because they regard the additional revenue collected by the federal government as a “tax increase”—even though the increased revenue is really the effect of a de facto spending cut. A Republican who would vote to cut or eliminate an ordinary spending program therefore won’t do so if it is packaged as a tax benefit.

How are tax expenditures, which transfer money by reducing tax liability, equivalent to direct government expenditures, such as a check? Let’s take an example. Suppose the government wants to incentivize businesses to make their facilities more accessible to the disabled. It could cut a check to businesses in order to subsidize the cost of building ramps, making restrooms wheelchair accessible, etc. Or, it could offer an “architectural barrier removal tax deduction” and a “disability access tax credit.” These tax credits, just like the check, transfer money from the government to businesses that make their facilities more accessible. The difference? Businesses get the money by paying lower taxes instead of through a government payment.

When it comes to controlling the deficit, and getting rid of government waste, lawmakers can no longer afford to ignore tax expenditure spending. It’s time to audit the tax code. This means measuring and evaluating tax expenditures, so that subsidies that don’t work are cut or reformed. And subsidies that do work are continued.

More importantly, it means integrating tax expenditures into the budget process. Tax expenditures, because they are largely ignored during the budget process, do not receive the same level of review and scrutiny that direct expenditures receive.  Politicians can no longer afford to ignore one-quarter of government spending every time it drafts the federal budget.