Homeowner tax breaks are breaking the budget
PRESIDENT BUSH'S tax reform panel has ventured into political no man's land. It wants to limit the tax deductions for home mortgages, employer-provided health insurance and state and local taxes.
Individuals and businesses love these tax breaks. Democrats and Republicans embrace them for their own ideological reasons. The constituencies backing them are powerful. But these sacred cows are in desperate need of reform. The Treasury needs the money to close the growing budget deficit, and these tax breaks often benefit the wrong constituencies, even hurting the very economic strata they are intended to help.
The money involved is astronomical, more than $700 billion a year, the Government Accountability Office says. In many years, the tax breaks cost more than the entire discretionary budget, including defense. Of the annual total, health insurance and pension deductions cost $126 billion and $48 billion, respectively. The mortgage interest deduction funnels $76 billion to homeowners.
In reality, these tax breaks are closer to spending programs than tax cuts. By giving deductions and exemptions, the government "spends" part of its potential revenue on programs for everything from housing to education to child care. The programs are run through the tax code to make them look like tax cuts. What's more, tax breaks shift the burden from taxpayers who can claim exceptions to those who can't.
The President's Advisory Panel on Federal Tax Reform is to make its final recommendations by Tuesday. Here are five reasons for reform:
* The benefits often help third parties more than the primary taxpayers. For example, the national homebuilders and Realtors associations champion the mortgage interest deduction not because they care about helping low-wage earners own homes but because the tax break inflates housing prices, which leads to higher profits. The perverse effect is that using the tax code this way actually pushes up prices, thus making houses out of reach for more people.
* These poorly targeted programs often pay people to do what they do anyway, as in buying a home or saving for retirement. That creates little positive behavioral or economic effect, while draining significant funds from the Treasury.
* Because many tax breaks are in the form of exemptions and deductions, they tend to be highly regressive. Often, only taxpayers who itemize realize the savings, and well-off taxpayers, who fall into higher marginal tax brackets, save the most.
