- Tax Vox Blog, Obama’s Cap on Tax Deductions: Not What It Seems, by Howard Gleckman:
It turns out that President Obama’s plan to limit the benefit of itemized deductions is much more than that. Not only would it reduce tax savings for mortgages, charitable gifts, high medical costs, and the like, it would also curb tax breaks for owners of municipal bonds, workers who buy health insurance, and those who earn money overseas.
The $400 billion plan is the centerpiece of Obama’s $467 billion package of tax increases aimed at paying for the stimulus package he announced on Sept. 8. It would limit to 28% the value of many tax preferences for those whose adjusted gross income is more than $200,000 ($250,000 for couples). Today, these tax breaks are worth 35 cents on the dollar for someone in the top tax bracket. Under Obama’s plan they would be worth just 28 cents.
The plan is often described as a cap on itemized deductions but in fact aims at a number of other politically popular tax breaks as well, including several exclusions that reduce the amount of income subject to tax.
An across-the-board cap on the benefit of deductions and the like is often seen as rough justice—a way to tackle the Revenue Code’s trillion dollars in tax expenditures without fighting over each one. The theory: It is an easier political lift to curb such popular breaks as the mortgage interest deduction through a broad reduction of all subsidies than to fight the powerful housing industry head-on.
But Obama does pick and choose the preferences he wants to target. He nails all itemized deductions, all right, but he also goes after some–but not all–above the line deductions. Of the roughly two dozen write-offs available to those who take the standard deduction, Obama targets just eight, including health insurance for the self-employed, medical savings accounts, health savings accounts, and some higher education expenses.
He also reduces the benefit of two other hot-button breaks—the tax exclusions for municipal bond interest and the value of employer-sponsored health insurance. In other words, for those making more than $200,000, some muni bond interest and some of the value of their medical coverage would be taxed.
However, Obama would protect other exclusions, including those for retirement savings. Picking winners and losers this way is likely to defeat any claims of rough justice and make passing the plan that much tougher.
President Barack Obama is asking lawmakers to tax the health insurance benefits of top earners, stirring opposition from congressional Democrats who fought a similar proposal in the 2010 health-care law.
The proposal, tucked deep inside the 155-page jobs legislation Obama submitted to Congress on Sept. 12, would make plans provided by employers partially taxable for couples earning more than $250,000 a year and individuals earning more than $200,000.
For these taxpayers, the proposal is a dramatic departure from their current tax treatment, in which all of their health benefits are exempt from taxation. It also revives a debate among Democrats over whether taxing health insurance plans for the wealthy sets the stage for one day expanding the tax to lower-income brackets. …
The resistance from Obama’s fellow Democrats indicates the president’s plan may not survive intact, as leaders of the Republican-controlled House already have said they oppose other tax provisions intended to offset the cost of cutting payroll tax rates and spending on infrastructure, schools and aid to states. …
Obama didn’t mention the health-care proposal during a trip to Ohio yesterday to promote the jobs package. The administration’s summary doesn’t specifically mention it, and the administration hasn’t promoted the policy rationale. …
Representative Richard Neal, a Massachusetts Democrat who is on the Ways and Means panel, said “there is great skepticism” among party lawmakers about the ways Obama has proposed to pay for the jobs bill. He called the offsets “talking points.”
