Chairman Rangel Calls Popular Tax Breaks Untouchable, But He’s Not So Afraid of Them

November 14, 2007

In the new BusinessWeek, Ways and Means Committee Chairman Charles Rangel seems to greatly expand the “third rail” of American politics.

That famous metaphor has always referred to Social Security: any politician who dared propose cutting Social Security benefits or taxes would be said to have stepped on the third rail, electrocuting his career.

Chairman Rangel told Maria Bartiromo that there are three more untouchables:

Some of the [proposals of the President’s Tax Reform Panel] were truly third rail. I mean, you’re not going to touch the churches and the synagogues and the not-for-profits. You’re not going to touch local and state [deductibility], and you’re darn sure not going to touch mortgage interest. And so the [Administration] didn’t do anything.

In our view, these tax breaks are much less deserving of third-rail treatment than Social Security, and in Chairman Rangel’s own bill, he doesn’t exactly treat them with reverence.

Of the three he mentions — the deductions for state-local tax payments, mortgage interest paid, and charitable donations — the most undeserving is the state-local deduction. The Tax Reform Panel suggested total repeal of this gigantic tax break that funnels money from people in low-tax states, counties and cities through the federal tax code to people in high-tax states, counties and cities. The state-local deduction is correctly disallowed under the AMT, but it’s still part of the regular tax code, and it’s still the root cause of the whole AMT fiasco. For more on why, see our two primers on the AMT, Fixing the Alternative Minimum Tax, and A Progressive AMT Fix Without Higher Tax Rates.

The mortgage interest deduction that the Chairman says he isn’t going to touch is equally unjustifiable. But considering the size of the housing sector and exaggerated sense of importance this tax break has in the minds of the American public, the Tax Reform Panel suggested not repeal but conversion to a credit and capping the value for very expensive homes. That would have given low-income homeowners the same percentage break from the provision as high-income people. More on that here.

As for the charitable deduction, the portion of the deduction that represents donations to religious organizations is close to untouchable, but many “non-profit” entities are far less deserving. Many in fact run huge businesses and should be paying tax instead receiving untaxed donations. Here’s an economic perspective on why people donate and how the tax code should treat it.

All three of these deductions have one thing in common: their benefits flow mostly to the top-earning 10 percent of American taxpayers. Some cynics would say that’s why they’re untouchable, but Chairman Rangel has not been shy about calling for higher taxes on top earners. In fact, ironically in light of this interview, his 4% surtax proposal would come directly out of Adjusted Gross Income before deductions. So even as the Chairman is telling us they’re untouchable, he’s sneaking a touch, so maybe this new third rail is actually losing power. That would be welcome news because some of the tax code’s big deductions, especially the state-local deduction, are ripe for repeal or at least severe limits if the nation is ever to have a fair and efficient tax code.

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