Obama Team Plots To End Child Tax Deductions, Mortagage Interest Payment Tax Deductions
Oct 25, 2010 15 Comments ›› Pat Dollard
Sacrosanct tax breaks, including deductions on mortgage interest, remain on the table just weeks before the deficit commission issues recommendations on policies to pare back with the aim of balancing the budget by 2015.
The tax benefits are hugely popular with the public but they have drawn the panel’s focus, in part because the White House has said these and other breaks cost the government about $1 trillion a year.
At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.
The officials are also looking at potential cuts to defense spending and a freeze on domestic discretionary spending. It is unclear if the 18-member panel will be able to reach an agreement on any of the items by a Dec. 1 deadline.
Even if they do reach an agreement, any curbs on current tax breaks would likely face tough sledding in Congress. The banking and real-estate lobbies have fiercely rebuffed efforts to rescind the mortgage-interest deduction in the past.
Still, officials have found there aren’t any easy ways to balance the budget, and they are expected to steer clear of more polarizing issues like Medicare, Medicaid, Social Security and a broad rewrite of the tax code in their short-term recommendations. The panel could still make long-term recommendations to change these issues, but they would be less concrete.
“My concern is that the talk of tax expenditures is couched as ‘tax reform,’ but it’s not tax reform,” said Alison Fraser, director of the Thomas A. Roe Institute for Economic Policy Studies at the conservative Heritage Foundation. “It’s simply a revenue-raising exercise.”
Committee officials plan to try to broker a deal in November, after the midterm elections. They have until Dec. 1 to win the support of 14 of the commission’s 18 members to endorse a final report. It is possible that the panel’s Democrats and Republicans would issue separate reports if they can’t agree, people familiar with the process said.
President Barack Obama created the National Commission on Fiscal Responsibility and Reform in February, amid concern from lawmakers and economists that the growing budget deficit could damage the country’s long-term fiscal condition. The bipartisan panel, made up mostly of lawmakers but also business and labor leaders, has met for months, at times more constructively than many expected.
“There’s a lot of potential for agreement on the committee,” said panel member Alice Rivlin, a senior fellow at the liberal-leaning Brookings Institution.
If the commission reaches a consensus, House or Senate leaders could agree to bring some of the changes up for a vote, perhaps early next year, although there is no deadline.
To balance the budget by 2015, excluding interest payments on debt, means officials would need to find roughly $240 billion in annual savings, according to commission documents. Panel officials also hope to issue recommendations that would “meaningfully improve” the country’s long-term fiscal situation.
Even though officials are focusing on issues where they believe they can get broad agreement, they will likely face stiff resistance from certain lawmakers and interest groups. Some Republicans are expected to label any caps on tax breaks as a backdoor way of raising taxes. Several lawmakers’ offices declined to comment on specific proposals as negotiations aren’t yet under way.
Committee officials have also focused on the $700 billion in annual defense spending, which accounts for more than half of domestic discretionary spending. Critics say the government could cut some of the $400 billion spent on outside contractors. But many conservative groups have said cutting military spending would be a mistake, citing national security risks.
Changes to Medicaid and Medicare are unlikely to be recommended despite their looming presence in the U.S. budget. The Congressional Budget Office has estimated that if laws don’t change, federal spending on health care alone will grow from 5% of gross domestic product in 2010 to 10% in 2035.
Commission officials looked closely at making short-term changes to Social Security, but talks shifted in recent weeks toward incorporating those ideas into a longer-term plan. This is in part because any changes would probably have to be phased in over years, delaying the budgetary impact for at least a decade.
“My sense from talking to members of the commission is that’s where they are focusing [on the long-term recommendation], Social Security reform,” said Martin Feldstein, an economics professor at Harvard University who served as a senior official in the Reagan administration.
It remains unclear whether the panel will reach a consensus with negotiations taking place right after the midterm elections, when Washington tends to buzz with political jostling. The imminent debate over whether to extend all or part of the Bush-era tax cuts could also complicate its efforts. The panel isn’t expected to weigh in on this issue.
The White House said this month that the budget deficit for the last fiscal year was $1.3 trillion, the second highest in 60 years. The government’s revenue was roughly $2.16 trillion in the year ended Sept. 30, compared with $3.46 trillion in outlays.
The White House hasn’t signed off on any of the potential proposals as it’s waiting for the panel to complete its work.
Mr. Obama “expects that the fiscal commission will continue the process of discussing and analyzing a wide range of ideas and it is premature to describe any specific idea as a conclusion of a commission that has not even voted yet,” White House spokesman Amy Brundage said.
The commission “is the last best hope right now for getting some substantive movement on the issue of the deficit, the debt, and the financial disaster we’re facing,” Sen. Judd Gregg (R., N.H.), a member of the commission, said in a recent interview.
