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.