If the White House and Congressional leaders decide to pare back the IRS code next year, tax writers from both parties will have no shortage of special-interest goodies to throw on the bonfire.
In the new White House report “The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform,” to achieve lower tax rates overall, Members are encouraged to simplify a dizzying array of carve-outs, deductions, write-offs and credits, which critics argue unfairly benefit targeted industries big and small.
“It’s this mutant blob where the only way you can find your way through is with guides,” one tax reform advocate said. “They’ve created their own games and there’s so many piled on top of each other that it’s falling apart.”
But simplifying the tax system also means agitating a number of powerful industries, which will no doubt exert their will to make sure they don’t wind up on the wrong side of any deal.
Mortgage Interest $572.9 billion
The National Association of Realtors is leaving little to the imagination as to how loud the trade group will yell to keep the federal itemized tax deduction for mortgage interest.
After the White House’s deficit commission recommended exempting second homes and replacing the deduction with a nonrefundable credit, Realtors President Ron Phipps issued a statement reminding lawmakers of its army of “For Sale”-sign-wielding foot soldiers.
“The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years,” Phipps said. The deduction “must not be targeted for change. NAR is actively engaged on behalf of the nation’s 75 million home owners and 1.1 million Realtors to ensure that the current deduction is not modified.”
The Realtors conducted an online poll in October that suggested almost 75 percent of homeowners, as well as two-thirds of renters, approved of the tax provision.
State/Local Taxes $250.2 billion
When the White House and lawmakers rewrote the tax code nearly 25 years ago, state and local tax payments were a target. It’s uncertain whether the deduction will be on the chopping block this time around, but news reports from yesteryear detail griping by mayors and governors whose governments imposed high taxes — and whose populations stood to lose the most.
According to a list tabulated by the Tax Foundation, high-wage-earners in New York and New Jersey now pay nearly 8 percent or more in state income taxes, while residents of states such as Texas and Florida pay no income taxes at all.
Larry Jones, assistant executive director at the U.S. Conference of Mayors, suggested that all the parties involved may not end up speaking with one voice on the state and local tax deduction matter. “Lowering the rates in general keeps more money circulating in our economy,” he said, but for now, the mayors group is staying quiet.
“We have not taken a position,” Jones said.
Charitable Donations $216.5 billion
In its recommendations, the White House deficit commission suggested lawmakers should slim down itemized, tax-deductible contributions to colleges and other charities with a nonrefundable tax credit. President Barack Obama has proposed reworking the tax code when it comes to charitable giving, which has struck fear into universities and other nonprofit groups that rely on donors’ kindness — and the subsequent tax breaks — to keep the lights on. In the budget he released early last year, Obama proposed raising more than $300 billion for the health care plan by capping charitable contributions on high-income families.
At the time, university and other nonprofit officials expressed their frustration to Roll Call. “Traditionally, the charitable deduction has been the cornerstone of philanthropy,” a Stanford University lobbyist said. Nonprofit executives are already making noise about the proposal. Caring to Change Director Mark Rosenman told the New York Times that the idea was “patently absurd.”
But depending on the details, a source in the D.C. foundation community indicated this week that the nonprofit world may be open to a compromise. “There’s room for conversations about that,” the source said.
Employer-Sponsored Health Care $568.3 billion
Insurance companies are already keeping a watchful eye on how Members might remake incentives for employer-based health care in any coming tax overhaul.
Workers whose employers offer health care now pay for their portion of premiums with pre-tax earnings. The White House’s deficit commission recommends reworking the system with a complex formula that health care providers worry may lead to companies dropping their offerings.
“The big, overarching thing is we don’t want to unravel the employer-based health care system,” an industry source said. “In the health care law, if they talk about a complete repeal, we would not support it. ... The employer-based system is working well for 160 million Americans.”
Another insurance industry source said the business community likely would oppose reworking how employees’ insurance costs are paid for.
“It’s an employer deal. They get the exemption,” the source said.
401(k)s and Other Defined-Contribution Retirement Plans $184.3 billion
Gone are days of “defined-benefit” pension programs, which have been replaced in recent decades with “defined-contribution” retirement accounts such as 401(k) plans. Using these investment vehicles, employees typically set aside a percentage of their pretax earnings to be invested in the stock market for retirement.
President Barack Obama’s deficit-reduction committee recommended doing away with the alphabet soup of “multiple retirement account options with different contribution limits” in favor of a consolidated system.
After the proposal was released Dec. 1, the head of the American Society of Pension Professionals and Actuaries suggested that the plan stood to blow up the system employees use to save for retirement. Executive Director and CEO Brian Graff said in a statement to PlanSponsor.com that “We urge Congress to carefully consider the impact of the Commission’s recommendations on tax incentives for employer-sponsored retirement plans.”
The nation’s largest retirees’ lobby also announced that it would fight an overhaul of the retirement system. AARP lobbyist John Rother claimed the recommendations “would actually increase the health and economic insecurity of millions of Americans."
“AARP believes strongly that the commission and our elected leaders need to more fully assess the impact of its recommendations on real people,” Rother said.