Democrats are in a bind when it comes to their domestic economic agenda. They have promised a number of new and costly initiatives such as fixing the Alternative Minimum Tax, providing middle-class tax relief, and increasing spending on homeland security and education. But they have also made a commitment to fiscal responsibility. So how can they deliver on their promises without opening themselves up to the old "tax and spend" label? Reforming tax entitlements -- a large, mostly under-the-radar part of the federal budget -- might just give them a way out of their predicament.

As a result of the 1986 bipartisan tax reforms, the tax base was broadened and the tax code was greatly simplified. But these reforms have been gradually undone as Congress has created scores of new tax breaks and loopholes. Want to preserve historic buildings, encourage alternative energy sources, help working families, or give certain industries a boost without appearing to increase spending? Voilà! -- a new targeted tax break is born.

Most tax expenditures are really spending programs designed to look like tax cuts. Picture them as vouchers for healthcare, mortgage payments, daycare, transportation -- name the tax break. Dressing these programs up as tax cuts makes them a much easier sell for politicians who fear the "big spender" label. But call them what you will, they drain the money from the Treasury and extend the scope of government. All told, this portion of the budget represents $800 billion in lost government revenues annually.

Not only do these tax breaks mask the true size of the government, they are a terrible way to make policy. They regularly pay people and businesses to do what they would do anyway, making them both poorly targeted and unnecessarily expensive. They are also extremely regressive. A particular tax exemption might be worth 35 cents on the dollar to a wealthy individual and only 10 cents to someone on the other end of the income scale who faces a lower tax rate. It would be hard to justify a housing policy that does more to subsidize the rich than the poor, yet that is exactly what the $80 billion a year home mortgage interest deduction does.

Moreover, tax expenditures do not get nearly the level of scrutiny they should. (If they did, would we really have a government program that subsidizes millionaires who buy vacation homes?) New government programs should only be created following vigorous debate over whether a proposed policy is important enough to warrant government intervention, and if it is, whether it will be effective. Discussions about new tax programs however, tend to focus almost exclusively on the cost. Billions of dollars of targeted tax cuts have been passed in the past few years with little or no discussion about the worthiness of their goals. And unlike spending programs, which are subject to congressional review, tax expenditure programs are pretty much on automatic pilot.

Reforming this area of the budget would not only be a critical step in improving the tax code (and probably the closest thing we will see to fundamental tax reform in the next two years) it could also generate tens -- if not hundreds -- of billions of dollars in savings.

The first step should be capping a number of existing tax breaks. Capping two of the largest breaks -- the home mortgage interest deduction and the exclusion for employer-provided healthcare, would easily provide over $50 billion a year in savings. Both of these changes would reduce the large subsidies that go to the highest earners while freeing up resources. Getting rid of a host of other tax breaks that subsidize certain businesses or industries could easily generate another $25 billion. A thorough review of the over 150 existing tax expenditures to determine which ones have outlived their usefulness would yield still more in savings. As Democrats search for ways to offset the costs of their new agenda, reducing the $800 billion tax loophole would be an excellent place to start.