Tax plans big on promises, short on painful details

McClatchy NewspapersApril 14, 2011 

WASHINGTON — The deficit-reduction plans offered by President Barack Obama and his Republican nemesis don't have much in common beyond this: Both envision huge savings by closing popular tax loopholes and bedrock deductions enjoyed by Americans and corporations, but neither one says what it would get rid of in the process.

Obama's speech Wednesday and the "Path to Prosperity" offered by House of Representatives Budget Committee Chairman Paul Ryan, R-Wis., suggest that about $1 trillion in savings is to be had by closing tax loopholes and deductions. These changes would happen in order to bring the top tax rate down to around 25 percent for corporations and individuals.

That's great if they're serious about it, and it's a big "if." They didn't spell out what they'd scrap on these so-called tax expenditures, so to make good on their promise they'd have to anger the rich, the poor, charities, unions, real estate agents, builders and bankers — just to name a few of those affected.

Although neither the president nor Ryan provided details about what popular tax breaks he'd end, they both gave a shout-out to the bipartisan deficit-reduction proposals that the National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center offered late last year.

Obama welcomed the chairmen of the commission to the White House on Thursday, saying before the meeting that it's "important that we look at our tax code and find a way to work together."

The separate proposals from the commission and the center provide great detail, calling for scrapping the mortgage-interest deduction and the deduction from federal taxes for what homeowners pay in state and local property taxes. Deductions for charitable giving would change, and the so-called Cadillac health care plans offered by employers, which aren't now treated as income, would lose their tax-break status.

"Those four items ... have extraordinarily active and powerful lobbies behind them, and just those four alone would be a huge bite to swallow, especially if you didn't touch any of the other tax expenditures, many of which go to larger businesses or other activities we want to encourage" through the tax code, said Steve Bell, a senior director at the Bipartisan Policy Center, a research group whose members are former lawmakers and top staff. "That's why the fight over eliminating these expenditures will be so nasty and bloody. You will see tens if not hundreds of millions of dollars spent on lobbying."

Bell should know. He was the staff director of the Senate Budget Committee during President Ronald Reagan's tax overhaul in 1985 and was deeply involved in the Senate's negotiations to carve out what's now called the Gramm-Rudman-Hollings balanced budget act. That law imposed binding caps on federal spending, and the painful experience taught Bell how difficult it will be to undertake serious changes to the sacred cows that are embedded in the tax code.

Since the Bipartisan Policy Center and the president's fiscal commission aren't constrained by politics, they offered real solutions to the nation's twin problem of deficits and debt. The center would change the mortgage-interest deduction to a refundable credit, and homeowners with mortgages valued above $500,000 would get no government support in the tax code. Second homes wouldn't qualify for the tax credit, an idea that won't sit well with resort communities on both coasts and in the mountain states.

The president's fiscal commission, similarly, would scrap the mortgage-interest deduction and replace it with a 12 percent nonrefundable tax credit.

Needless to say, among those opposed to these ideas are real estate agents, mortgage bankers, homebuilders and the rich.

Likewise, governors and mayors across the nation aren't likely to support the end of federal tax deductions for state and local property taxes, and an end to deductibility for interest on state and municipal bonds. Reagan succeeded in ending deductibility of state sales taxes in 1985, but he failed in his attempt to scrap the deductibility of property taxes. The fiscal commission and the center called for ending this break, which supports real estate investment and development.

Few changes would be as controversial as the call in the fiscal commission's and center's plans to scrap the 15 percent tax rate on capital gains and dividends, earnings that usually come from stock-market investments.

Under both plans, capital gains and dividends would be taxed at the rate of ordinary income. If investors were in the 12 percent or 22 percent income-tax rate, that's the rate they'd be taxed for capital gains and dividends. If they were at the top rate, they'd be taxed at the top rate of 25 to 28 percent.

At a briefing Thursday, White House spokesman Jay Carney ducked questions about tax specifics, referring questions to the Office of Management and Budget.

An OMB spokesman, Kenneth Baer, said the administration's proposed 2012 budget would reduce the maximum rate of itemized deductions for families with taxable income above $250,000, but other than that the White House wasn't commenting on the specific large cuts the commission and center advocated.

"Those bipartisan groups have done a real service by charting out some options for policymakers. It's going to really help inform this debate ... over how we get a fiscal plan together, he said.

An aide to Ryan also declined to provide specifics, noting that the tax changes called for in the Path to Prosperity are in the jurisdiction of the tax-writing Ways and Means Committee. The congressman had no position on what should happen to the capital gains tax.

Both Obama and Ryan envision a top corporate tax rate in the 25 percent to 28 percent range, and an end to corporate tax breaks in exchange. But again, neither camp offered specifics.

"It's easy for business in general to rally around a 25 percent rate, or a lower rate, but when you get to (tax) base broadening that's where it's going to be very tricky," said Dorothy Coleman, the vice president of tax policy for the influential National Association of Manufacturers.

Much as Bell predicted, Coleman expects a messy process.

"This is going to be a very tough debate. I think manufacturers look at it and say we do need to have some base broadening ... but we don't want to end up at the end of the day with a higher tax bill than we have now," she said.

(Margaret Talev contributed to this article.)

ON THE WEB

Obama deficit reduction framework

Ryan's "Path to Prosperity"

Fiscal commission report

Bipartisan Policy Center report

Some major tax breaks

MORE FROM MCCLATCHY

McClatchy's probe into roots of financial crisis, a Pulitzer finalist

To ask a question about this story or any economic question, go to McClatchy's economy Q&A

Senate panel rebukes Goldman, others over risky mortgage deals

Obama's deficit plan begins tug-of-war with Republicans

Obama borrows time with deficit reduction plan

McClatchy Newspapers 2011

McClatchy Washington Bureau is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service