Democrats, led by President Barack Obama, want lawmakers to consider a fresh set of tax increases in the next several weeks when they discuss whether to cut spending.
Republicans oppose raising tax rates, especially after they just raised some of them for the first time in two decades in the New Year’s deal that extended most – but not all – of the expiring Bush tax cuts.
But much of what Obama is talking about is raising tax revenue without actually raising tax rates. In Washington-speak, lawmakers will try to collect more tax money by closing tax loopholes, perhaps limiting popular tax deductions and to some degree changing the way citizens pay into the popular Medicare and Social Security programs.
The New Year’s deal raised income tax rates for individuals’ taxable income above $400,000 and family income above $450,000. That’s less than 1 percent of all U.S. taxpayers. The deal is projected to raise about $600 billion over 10 years, not enough to significantly chip away at deficits that still will total more than $6.8 trillion over the same period. Lawmakers on Capitol Hill will be looking to trim $2 trillion over 10 years from projected future deficits as part of any deal to raise the nation’s debt ceiling by the end of February and prevent $109 billion in deep spending cuts from occurring in March.
Democrats say Obama will continue to push for an equal split between revenues and cuts – $1 trillion in new tax revenues and $1 trillion in spending cuts.
“The president believes, as Republicans have said they believe, that we need to reform our tax code, and that there are loopholes that are crying out to be closed that no longer serve the country, if they ever did, and that there are ways of capping deductions and reforming our tax code that can produce more revenue in a fair way that, again, does not burden the middle class, but asks the wealthiest to pay more,” White House spokesman Jay Carney said.
Carney declined to discuss specifics, but the New Year’s deal fell short of Obama’s campaign pledge to raise revenue on the top 2 percent of wage earners, though individuals earning more than $250,000 and couples earning more than $300,000 would still be taxed higher because some of the value of their exemptions and itemized deductions would be phased out.
“He’s always said it would require more than that, and that there would be this effort to curtail loopholes and deductions,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan budget watchdog group. “I don’t think we are through with the tax piece, although Republicans think we are. The next couple of months are going to be just horrendously acrimonious.”
Raising tax revenues without raising tax rates could take several forms.
One proposal popular with economists is treating some portion of employer-provided health insurance as taxable income on a filer’s tax return, an idea proposed by Hillary Clinton and accepted by many Democrats during the 2008 campaign. If a health plan is valued at more than $14,000, for example, the sum above that could be treated as taxable income.
Another idea would be to limit how much mortgage interest, state taxes or charitable giving can be deducted from taxes by high-income earners. The New Year’s deal started phasing out some of the tax exemptions claimed by high-income earners and limiting their tax deductions. This could gain in popularity because tax rates remain unchanged and middle-income Americans would not be affected.
A bipartisan presidential commission in 2010 favored scaling back mortgage-interest deductions, in part because they effectively subsidize the wealthy by offering them a bigger discount off a higher tax rate. The problem is that rolling this program back is fraught with risk in today’s impaired housing market.
“How do you phase it in? The more you cut back, the more effect it has on the housing market,” noted Roberton Williams, a senior fellow at the Tax Policy Center, jointly run by the center-left Brookings Institution and the centrist Urban Institute. “How do you deal with that transition period?”
Republicans insist that any new tax revenue be used not to reduce deficits but rather to lower tax rates and broaden the tax base. The GOP insists the focus should be on so-called entitlement programs such as Medicare, Medicaid and Social Security.
Senate Minority Leader Mitch McConnell, R-Ky., said this week that reining in spending – and not raising taxes – will be the crux of the upcoming fiscal debates.
“The tax issue is behind us,” McConnell told ABC News. “Now, the question is what are we going to do about the real problem. . . . Now it’s time to pivot and turn to the real issue, which is our spending addiction.”
Federal spending on health care – namely Medicare and Medicaid – threatens to swamp the entire budget over coming decades. Baby boomers, born between 1946 and 1964, are starting to retire and will strain federal coffers over the next several decades.
But tweaking these programs, along with Social Security, angers older Americans, who are more politically involved than younger generations. AARP, the lobby for seniors, helped beat back a GOP proposal in late December to change the way cost-of-living adjustments are made for Social Security benefits.
Sen. Bob Corker, R-Tenn., plans to reintroduce the idea in a forthcoming bill.
The coming negotiations on the spending side won’t exactly amount to starting from scratch.
During a series of negotiations in the fall between Obama and House Speaker John Boehner, R-Ohio – which eventually failed – the president proposed $1.2 trillion in spending reductions while Boehner offered $1 trillion. The two sides found common ground on spending.
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