GOP tax plan targets itemized deductions

A GOP plan to raise taxes by $290 billion over the next decade would limit deductions for mortgage interest, charitable donations and state and local taxes as part of a deficit-reduction deal. Some workers could also see their employer-provided health benefits taxed for the first time, though aides cautioned that the plan is still fluid.

The plan by Sen. Pat Toomey, R-Pa., who serves on the 12-member debt supercommittee, would raise revenue by limiting the tax breaks enjoyed by people who itemize their deductions, in exchange for lower overall tax rates for families at every income level. Taxpayers who already take the standard deduction instead of itemizing — about two-thirds of filers — could see tax cuts. The one-third of taxpayers who itemize their deductions might find themselves paying more.

The top income tax rate would fall from 35 percent to 28 percent, and the bottom rate would drop from 10 percent to 8 percent. The rates in between would be reduced as well.

A GOP congressional aide said the plan is designed to raise taxes on households in the top two tax brackets. That would affect individuals making more than $174,400 and married couples making more than $212,300. Some Republicans say the plan offers a potential breakthrough in deficit-reduction talks that have stalled over GOP opposition to tax hikes and Democrats' objection to cuts in benefit programs without significant revenue increases.

House Speaker John Boehner, R-Ohio, spoke of it favorably, but his party's majority leader, Rep. Eric Cantor of Virginia, has declined to endorse it. Several GOP presidential hopefuls also have criticized if for offering to increase taxes.

Democrats, meanwhile, have panned the plan, saying it would cut taxes for the wealthy, raise taxes on the middle class and generate less revenue than advertised.

The supercommittee has a Wednesday deadline to come up with a plan to reduce government borrowing by at least $1.2 trillion over the next decade. If the panel fails, $1.2 trillion in automatic spending cuts to domestic and military programs would take effect in 2013.

Some details of Toomey's plan remain in flux, in part because he is open to changes to help forge an agreement, said the GOP aide, who spoke on condition of anonymity to discuss private negotiations. The aide confirmed that Toomey's plan is closely modeled after a proposal by three experts at the National Bureau of Economic Research, a private research organization perhaps best known for deciding when recessions begin and end.

The three experts are Martin Feldstein, a Harvard University professor who was President Ronald Regan's chief economic adviser; Maya MacGuineas, president of the Committee for a Responsible Federal Budget; and Daniel Feenberg, a research associate at the bureau.
Under their plan, the tax benefits from itemizing deductions and excluding employer-provided health insurance from taxable income would be limited to 2 percent of taxpayer's adjusted gross income.
That means if a taxpayer has an adjusted gross income of $50,000, deductions and exemptions could reduce his or her tax bill by a maximum of $1,000.

Taxpayers who face limits on their tax breaks could opt to take the standard deduction instead. Currently, about one-third of tax filers itemize their deductions. The rest claim the standard deduction, which in 2011 is $5,800 for individuals and $11,600 for married couples filing jointly.

The plan envisions millions of additional taxpayers switching to the standard deduction, which would simplify their returns, MacGuineas said.

Policymakers across the political spectrum agree the federal tax code is too complicated, and most agree on a basic formula for simplifying it: Reduce tax breaks and use the additional revenue to lower the overall tax rates for everyone.

There is little agreement, however, on which tax breaks to target. The most generous provisions exempt employer-provided health insurance and retirement benefits from taxable income. The top itemized deductions include those for mortgage interest, charitable donations and state and local taxes.

Toomey's plan attempts to sidestep debates over which tax breaks to target and instead proposes to limit taxpayers' overall ability to reduce their tax bills.

"This is a far more practical way to start to scale back the influence and costs of tax expenditures in the code by kind of glopping them together and capping them," MacGuineas said. "You're not picking the winners and losers."

Economist Douglas Holtz-Eakin said the proposal "strikes me as quite clever."

"Right now we let people choose between the standard deduction and itemized deductions," said Holtz-Eakin, a former director of the(...)Read more.