There are already signs that a key tax element of President Obama’s budget--his proposal to limit to 28 percent the value of all tax deductions—may not survive on Capitol Hill. And if it is allowed to die, Congress may find itself staring squarely at another hard-to swallow tax hike—trimming the tax exclusion for employer-sponsored insurance.
Key Republicans have strongly objected to the curb on deductions. Powerful Democrats, including Finance Committee chairman Max Baucus (D-Mt), are less than enthusiastic. Charities that fear they will lose contributions are gearing up for a big fight, even though TPC estimates that gifts would decline by only about 2 percent. And in the face of this criticism the Administration has signaled that it may not fight very hard to save the proposal. "We recognize there are other ways to do this," Treasury Secretary Tim Geithner told the Finance panel yesterday.
The message is becoming clear: As long as Congress finds at least $300 billion from somewhere to help pay for health reform, Obama won’t go to the mat for the deduction cap.
The problem, of course, is that $300 billion is a lot of money, and there are not many places in today's revenue code Congress could find it. Democrats might be tempted to raise rates, but Obama has already proposed allowing the Bush tax hikes to expire, a step that would push the top rates back to 36 percent and 39.6 percent. He has also proposed restoring the pre-2001 caps on itemized deductions and personal exemptions for high-earners. In that environment, it is hard to imagine Congress would be willing to raise rates even more. Such a proposal would be assured of getting no GOP votes.
At the same time, Obama has steadfastly refused to raise any taxes for those earning less than $250,000 and, indeed, promised to cut taxes for everyone making $200,000 or less. It is not clear whether he’d stick to that promise if Congress were willing to be, let us say, somewhat flexible on who would pay more.
That leaves only a couple of other potential targets, at least on the individual tax side. Obama could directly try to limit the value of the home mortgage deduction for high-earners—another tough battle at any time, and especially in the midst of a housing crisis.
Or, he could try to cap the tax exclusion for employer-sponsored health insurance—an item that reduces federal revenues by more than $250 billion annually and is an obvious way to help pay for broad health reform. In a recent list of potential changes to the medical system, CBO outlined one option for capping the exclusion that would raise about $450 billion over a decade, comfortably more than the $300 billion hole Obama wants Congress to fill.
If Congress must find $300 billion in new tax revenues and is unwilling to cap deductions, it will inevitably find itself looking at the exclusion for employer-sponsored insurance. Taking such a step won’t be easy, either politically or substantively, but it is becoming increasingly hard to ignore.
