Put Tax Breaks for Mortgages, Local Taxes on Table

 

Supercommittee members Sen. Pat Toomey and Rep. Jeb Hensarling are taking flak from some conservatives for proposing a deal including increases in “revenues,” and a Washington Post reporter had some fun insinuating that they were backing a tax-rate increase.

As this is written, no one knows what the supercommittee will do (or not do), but it’s worth taking a look at what Toomey and Hensarling actually were talking about. It may not matter now, but could after 2012.

They were raising the possibility, as Barack Obama’s Bowles-Simpson commission did last December, of a tax reform bill that, like the 1986 tax reform act, would eliminate tax preferences and lower tax rates.

 

The 1986 bill was passed with bipartisan support, and there’s a potential for bipartisan support again.

The problem in putting such a measure together is that most really egregious tax preferences don’t add up to much money. Just as the big money for long-term spending cuts must come from changes in entitlements — Social Security, Medicare, Medicaid — so the big money you can get from eliminating tax preferences comes from three provisions that are widely popular.

The three are the charitable deduction, the home mortgage interest deduction, and the state and local tax deduction.

The charitable deduction should probably be off the table. The Obama administration has proposed reducing it for high earners. But this obvious attempt to channel flows of money away from the voluntary sector and toward the federal government went nowhere even when Democrats controlled the House and had a supermajority in the Senate. It’s anathema to many Democrats and just about all Republicans.

The home mortgage interest deduction may seem similarly sacrosanct. But the fact that the vast bulk of the “tax expenditures” — the money the government doesn’t receive because taxpayers deduct mortgage interest payments from total income — goes to high earners with big, expensive houses.

Traditionally it’s been argued that government should provide incentives for homeownership because homeowners more than renters have a stake in their community. But it’s obvious now that we have over-incentivized homeownership, with government encouraging loans to noncreditworthy borrowers.

At the same time, high earners don’t need an incentive to buy a home. If we limit the mortgage interest deduction to some amount near the median housing price, some folks will still buy $1 million homes, though they may finance them a little differently. And the government can get more revenue without an economy-crushing tax rate increase.

Similarly, what about a cap on the state and local tax deduction? Initial conservative reaction will likely be hostile: Why increase some people’s federal tax bills? Isn’t that attacking a core Republican constituency?

Actually, it’s not and not. The state and local tax deduction is worth a lot more to high earners than to modest earners, and it’s worth nothing to the nearly half of households that don’t pay federal income tax.

But it’s worth the most to high earners in high-tax, high-spending states. Those people are more likely to be Democrats than Republicans. The 2008 exit poll tells the story.

Nationally, voters with incomes over $100,000 voted 49 percent to 49 percent in the presidential race. Those with incomes over $200,000 voted 52 percent to 46 percent for Barack Obama.

In high-tax, high-spending states, Obama did even better with high earners. He carried $100,000-plus voters with 55 percent in Connecticut, 56 percent in New York, 52 percent in New Jersey, 55 percent in Maryland, 54 percent in Illinois and 57 percent in California.

All those states have high state income taxes except for Illinois, and it increased its income tax rate by two-thirds earlier this year. And those states contain a huge share of the nation’s highest-priced housing.

In contrast, in low-tax, low-spending states with relatively inexpensive housing, $100,000-plus voters favored John McCain, who won 65 percent of their votes in Texas, 55 percent in Florida and 61 percent in Georgia.

It is no coincidence that the high-tax, high-spending states tend to have strong public employee unions. In effect, the unlimited state and local tax deduction is a federal subsidy of the indefensibly high pay, benefits and pensions of public employee union members. Limiting the state and local tax deduction would create a political incentive to hold those costs down.

So ironically, limiting high earners’ lucrative tax deductions may prove a harder sell among Democrats than Republicans. But maybe Republicans should give it a try anyway.

COPYRIGHT 2011 THE WASHINGTON EXAMINER, DISTRIBUTED BY CREATORS.COM

Steve Chapman

By

Steve Chapman is a columnist and editorial writer for the Chicago Tribune, where he has been a member of the editorial board since 1981. He came to the Tribune from The New Republic magazine, where he was an associate editor. He has contributed articles to Slate, The American Spectator, The Weekly Standard and Reason, and has appeared on numerous TV and radio news programs, including The CBS Evening News, NBC Nightly News, The News Hour with Jim Lehrer, and National Public Radio's Fresh Air and Talk of the Nation. Born in Brady, Texas, in 1954, Chapman grew up in Midland and Austin. He attended Harvard University, where he was on the staff of the Harvard Crimson, and graduated with honors in 1976. He has been a fellow at the American Academy in Berlin and the Hoover Institution at Stanford University, and has served on the Visiting Committee of the University of Chicago Law School.

Crisis Magazine Comments Policy

This is a Catholic forum. As such:

  1. All comments must directly address the article. “I tell you, on the day of judgment men will render account for every careless word they utter.” (Matthew 12:36)
  2. No profanity, ad hominems, hot tempers, or racial or religious invectives. “And be kind to one another, tenderhearted, forgiving one another, as God in Christ forgave you.” (Ephesians 4:32)
  3. We will not tolerate heresy, calumny, or attacks upon our Holy Mother Church or Holy Father. “And I tell you, you are Peter, and on this rock I will build my church, and the powers of death shall not prevail against it.” (Matthew 16:18)
  4. Keep it brief. No lengthy rants or block quotes. “For you are a mist that appears for a little time and then vanishes.” (James 4:14)
  5. If you see a comment that doesn’t meet our standards, please flag it so a moderator may remove it. “Brethren, if a man is overtaken in any trespass, you who are spiritual should restore him in a spirit of gentleness.” (Galatians 6:1)
  6. All comments may be removed at the moderators’ discretion. “But of that day and hour no one knows…” (Matthew 24:36)
  7. Crisis isn’t responsible for the content of the comments box. Comments do not represent the views of Crisis magazine, its editors, authors, or publishers. “Why do you pass judgment on your brother? Or you, why do you despise your brother? For we shall all stand before the judgment seat of God… So each of us shall give account of himself to God.” (Romans 14:10, 12)
MENU