Tax overhaul faces resistance from fans of some deductions
WASHINGTON » President Donald Trump and congressional Republicans have pledged to overhaul the nation’s complex tax code. To slash taxes, they say they’ll curb a web of expensive deductions and credits to allow more revenue to flow to the government.
Problem is, they’re likely to run into a wall of resistance from people and groups drawn together by a singular warning: Don’t touch my deduction.
Major cherished tax breaks — from deductions for mortgage interest and charitable donations to incentives for 401(k) contributions — have deep-pocketed supporters and lobbyists who are sure to fight to preserve those benefits. They add up to hundreds of billions of dollars in lost potential revenue that could otherwise go to rebuilding roads and bridges or social programs or even to help finance broader tax cuts for people and companies.
“On every single item, there’s a group out there ready to battle,” says Thomas Cooke, a professor and tax expert at Georgetown University.
This makes the outlook thorny for a tax rewrite effort this fall, a Trump priority that Republicans consider a political imperative looking ahead to next year’s midterm elections. The collapse of GOP health care legislation raises the stakes for taxes, with Trump’s team offering an ambitious timetable.
“We’re on track to get this done by the end of the year,” Treasury Secretary Steve Mnuchin said Thursday in an interview with CNBC.
The president and the GOP agree on the broad goals: Simplifying the tax code, lowering the rate for corporations from the current 15-35 percent range, and bringing relief for the middle class. But details have to be filled in.
“We’ve already agreed on the outlines and now we’re refining the micro-details,” Speaker Paul Ryan, R-Wis., said Thursday during a visit to a knife-manufacturer in suburban Milwaukee.
Among the seemingly unassailable benefits, the most cherished may well be the deduction of interest paid on mortgages. Touted as a pillar in the promotion of homeownership, the benefit cost the government an estimated $77 billion in the budget year that ended last Sept. 30, according to Congress’ Joint Committee on Taxation.
The benefit allows homeowners to deduct up to $1 million in interest payments on a primary (and a secondary) residence. It is fiercely defended by the National Association of Realtors, which spent $64.8 million on lobbying on various issues last year including the mortgage deduction, according to the Center for Responsive Politics.
Roughly 28 million Americans deduct mortgage interest from their income taxes, with the biggest concentrations in the high housing-cost states of California, New York, New Jersey, Virginia and Maryland, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.
House Republicans say they’ve got a more efficient way to encourage home buying. Under their plan, the standard deduction would be increased from the current $12,600 for married couples filing jointly, for example, to $24,000. They argue that a majority of homeowners would no longer choose to itemize deductions and claim the mortgage-interest benefit. They’d be better off using the bigger standard deduction.
Another possibility is halving the mortgage deduction to $500,000. That would surely set up a pitched battle.
Other highly popular benefits:
—Employees’ earnings from defined-contribution retirement plans such as 401(k) s are not taxed until retirement; pay-ins by both employers and employees also receive tax-preferred status. That cost $82.7 billion in the most recent budget year.
Among the ideas circulating among some Republicans is reversing that by taxing investment earnings upfront, not upon retirement; or reducing the limits on pre-tax contributions.