Former Senator Calls Home Mortgage Interest Deduction “Indefensible”

August 6, 2006

The Senate Finance Committee held a hearing on Thursday to “kick-off” the push for fundamental tax reform. Even though Chairman Grassley and Oregon Senator Ron Wyden were the only senators present at the hearing, it is good to see that some in Congress will try and take off where the Tax Reform Panel left off 10 months ago and begin the push for fundamental tax reform. Elizabeth Garrett, James Poterba, John Breaux, and Connie Mack of the President’s Tax Reform Panel testified, in addition to GAO Comptroller David Walker and Jane Gravelle, an economist with CRS.

Much of the hearing focused on the mortgage interest deduction, which is the 800-pound guerilla in the room that has helped quell any chance at fundamental tax reform. Senator Mack gave his take on the importance of taking on this sacred cow:

That’s a huge issue, and you are going to have enormous pressure from all of the groups that we dealt with back in 1986 to retain that. But I’ll give you a personal opinion of mine and this does not necessarily reflect the panel. My feeling is that if you are really going to address the issues of simplification, and fairness, and growth, you have to go modify the way we treat the mortgage interest deduction. It is indefensible. As John (Breaux) indicated earlier, there are countries — England, Australia, Canada — that have no mortgage interest deduction, and have about the same ownership rates as we do…. Secondly, it’s an enormous distortion with respect to people making decisions about where we’re going to invest monies…. So I think it’s imperative, but you’re going to run into enormous forces to keep that from happening. But I do believe it can be done. Absolutely.

The hearing also dealt with the issue of the tax code’s role in the healthcare system. James Poterba gave his opinion on the deduction for employer-provided health insurance:

The distortion we create with the current system encourages overconsumption of health insurance. It insulates the consumer from the price of healthcare purchased from the provider. And it surely leads to greater outlays at any point in time on healthcare than we would have in a world which created a level playing field, and health insurance and health outlays were treated in a more symmetric way with other purchases of the household.

Finally, Senator Wyden’s comments to close out the hearing were somewhat optimistic with regards to where we stand on getting some action done on Capitol Hill on this issue, and the Senator emphasized the importance of this issue, which is why he has been so forceful on it over the past year:

I think…that there are key consensus principles for bipartisan tax reform. And they are in front of us if we can kind of hold off the politics and be willing to work together.

Simplifying the tax system is certainly something that has broad support — giving all persons the opportunity to accumulate wealth, giving markets the chance to drive the economy, not government, and being sensitive to issues of the deficit. And a lot of those principles are not very different from what they did in 1986.

So the fact that we’ve been able to bring leaders like yourselves together is exactly what I have been hoping we could do, and with Chairman Grassley and Senator Baucus leading us, I think over the next six months, we can put this in place, and then go to work.

We can only hope…

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