Put Tax Breaks for Mortgages Local Taxes on Table

By Michael Barone

width=71Supercommittee 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 its 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 Obamas 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 theres a potential for bipartisan support again. The problem in putting such a measure together is that most really egregious tax preferences dont 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. Its 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 doesnt receive because taxpayers deduct mortgage interest payments from total income -- goes to high earners with big expensive houses. Traditionally its been argued that government should provide incentives for homeownership because homeowners more than renters have a stake in their community. But its obvious now that we have over-incentivized homeownership with government encouraging loans to noncreditworthy borrowers. At the same time high earners dont 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 peoples federal tax bills? Isnt that attacking a core Republican constituency? Actually its not and not. The state and local tax deduction is worth a lot more to high earners than to modest earners and its worth nothing to the nearly half of households that dont pay federal income tax. But its 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 $100000 voted 49 percent to 49 percent in the presidential race. Those with incomes over $200000 voted 52 percent to 46 percent for Barack Obama. In high-tax high-spending states Obama did even better with high earners. He carried $100000-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 nations highest-priced housing. In contrast in low-tax low-spending states with relatively inexpensive housing $100000-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.

Michael Barone senior political analyst for The Washington Examiner (www.washingtonexaminer.com) is a resident fellow at the American Enterprise Institute a Fox News Channel contributor and a co-author of The Almanac of American Politics.

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