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Repealing Mortgage Interest Deduction Could Pay for Seven SCHIPs

2 min readBy: Gerald Prante

It’s pretty funny to hear members of Congress discussing the priorities of children’s health as if raising the cigarette taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. were the only option that they have to fund it. And that begs the question…why has no other tax increase been discussed throughout this entire SCHIP debate?

The purpose of cigarette taxes is not to raise general money for the government and its programs. The purpose is to control for a negative externalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. on society. If the tax is smaller than the externality, then it should be raised. It shouldn’t be raised merely because there is some expiration of a popular government program. The two have nothing to do with each other and tobacco is merely being arbitrarily picked as a funding source by politicians who want to do two things: (1) appease paternalistic interest groups while at the same time (2) support a government program by raising taxes on a minority of individuals, regardless of the fact that they tend to be disproportionately low-income.

Why don’t members of Congress fund SCHIP by repealing bad tax and spending policies? We can start with the deduction for home mortgage interest, which the government estimates will cost nearly $90 billion in FY 2008, which is over seven times the annual SCHIP funding that a coalition of Senators are calling for ($12 billion per year). That doesn’t even include the other $39 billion that the government loses every year by not taxing capital gains on the sales of most homes. (Plus, the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. repeal would be about 50 times more progressive a tax change than raising the cigarette tax.)

Or we could stay inside the health care issue and repeal or reform the exemption of employer-provided health insurance from the tax code, which will cost the government $160 billion in FY 2008. Merely limiting the size of the Cadillac plans could likely raise enough to finance SCHIP.

Finally, the government could liberally finance SCHIP expansion by merely eliminating the exemption for municipal bond interest, which most economists would agree is highly inefficient.

Unfortunately, such special tax provisions are supported by special interests on Capitol Hill, and therefore, eliminating them would take some political courage. On the other hand, raising a tax on an unpopular minority of Americans to pay for a program that provides broad public benefits takes little, if any, courage.