In the new BusinessWeek, Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. 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 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. 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 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. 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% surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. proposal would come directly out of Adjusted Gross IncomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” 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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