Tax Analysts Blog

Camp Hits Popular Deductions Hard

Posted on Mar 10, 2014
The largest tax expenditure in the code is the exclusion for employer-provided healthcare insurance. It cost the government $130 billion in lost revenue in 2013. It’s also the only major individual tax expenditure that isn’t on the chopping block under House Ways and Means Committee Chair Dave Camp’s comprehensive tax reform discussion draft. Camp would outright repeal the deduction for state and local taxes, and he severely cuts back both the charitable and home mortgage interest deductions.

The elimination of the state and local tax deduction is one of the larger revenue raisers in Camp’s plan. It would raise almost $1 trillion over 10 years, according to a 2013 Joint Committee on Taxation report. Democratic Sen. Charles Schumer of New York took one look at Camp’s zeroing out of the deduction and called the chair’s plan dead on arrival. Schumer’s objection isn’t surprising. The state and local tax deduction primarily benefits populous, high-tax, blue states like New York. Democrats from New York, Massachusetts, and California aren’t likely to be supportive of what is, in effect, a targeted tax increase on their constituencies.

Nominally, the home mortgage interest and charitable deductions fared better. Camp would limit the home mortgage interest deduction to interest on the first $500,000 of principal (that number is $1 million today), and he would impose a 2 percent floor on charitable deductions. According to the Ways and Means chair, the changes to home mortgage interest would affect only a small number of taxpayers (most of whom, by the way, probably live in blue states or in Democratic-leaning urban areas with high real estate values).

But former Ways and Means staffer (and current member of Tax Analysts' board of directors) John Buckley says the story goes much deeper than just looking at the direct changes to the two deductions. Indirect changes to the code under the Camp draft would effectively repeal both the home mortgage interest and charitable deductions for 95 percent of taxpayers, Buckley writes. Camp would raise the standard deduction to $22,500 for joint filers. He also repeals several other itemized deductions. That means that the number of taxpayers who choose to itemize will drop. The net effect of the Camp draft’s changes is to push more and more taxpayers away from taking advantage of the home mortgage interest deduction.

There are many economists who argue against the home mortgage interest deduction. But it is a bit of a third rail in politics, and its outright repeal is seldom seriously proposed. Some plans have called for it to be converted to a refundable credit, which would increase progressivity. It’s fairly obvious why Camp didn’t go that route: He needed the revenue from effective repeal. In contrast to the credit approach, Camp’s plan wants to shift lower- and middle-income taxpayers away from the charitable and mortgage interest deductions altogether. So Camp’s argument that his changes will only affect the richest taxpayers is a tad disingenuous. Sure, the deductions will be less generous for high-income taxpayers, but other changes to the code mean that only wealthy itemizers will be able to use the deductions at all.

Camp would argue that you can’t look at these changes in a vacuum. You have to consider the rate cut that many taxpayers would receive when the top bracket drops to 25 percent. So while taxpayers would see a tax increase because of fewer itemized deductions, their taxes would drop because of lower rates. The Camp plan is supposed to be distributionally neutral (hence the elaborate design of the surtax and changes to how capital gains are taxed). But this line of reasoning has fallen flat before.

When Steve Forbes wanted to push everyone to a flat tax while eliminating most tax expenditures, he promoted the idea that everyone’s taxes would drop. But that didn’t make the idea any more popular with the scores of taxpayers who benefit from popular deductions like those for charitable contributions, home mortgage interest, and state and local taxes. Camp’s plan, in effect, is doing the same thing, but in a much subtler way.

Read Comments (2)

edmund dantesMar 10, 2014

The healthcare tax expenditure is, in fact, hit by the Camp proposal, because,
as I understand it, higher income taxpayers will have to pay the 10% surtax on
the value of their employer-provided health insurance.

More importantly, I'm not certain that the health care tax expenditure really
is the largest one. I suspect that the tax expenditure for the exemption from
taxes for endowments, especially for the Harvards and Yales, is much larger.
But we can't know that, because those institutions are so politically powerful
that their tax preference has been defined out of the list of "tax
expenditures" entirely, so it is never quantified.

I just read through the 2013 JCT tax expenditure report, and they are happy to
tell you the "cost" of tax deferral for 529 plans and the total "cost" of
deductions for contributions to education, but nowhere do they itemize the
taxes that would be due from endowments if they were properly brought within
the tax tent.

Camp should have extended taxation to everyone, and he should have eliminated
the tax freedom for state and local borrowing entirely, instead of capping the
benefit. But it's a good start.

BTW, I don't agree that if your standard deduction is now so large that you no
longer need to claim your mortgage interest as a deduction you've somehow
"lost" the benefit of the deduction. It's true that others have effectively
the same "benefit" without having a mortgage obligation. So what? You are no
worse off.

amt buffMar 10, 2014

In any revenue neutral and distributionally neutral tax reform people who make
greater than average use of ordinary tax breaks will see a tax increase. People
who make less than average use of ordinary tax breaks will see a tax decrease.
Guess which group will be louder advocates for their cause...

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