Thursday, October 13, 2005

Tax Reform Panel Recommends Limiting Mortgage, Health Care Deductions

In January, President Bush asked former Senators Connie Mack and John Breaux to lead a commission investigating major changes to the tax code. The full report of the President's Advisory Panel on Federal Tax Reform is due November 1, but two major proposed changes were announced earlier this week: capping (not eliminating) deductions for mortgage interest and health care. As with caps in payments to individuals for agriculture subsidies, these are good policy ideas and will make the economy more dynamic.

The Washington Post first reported that the panel recommends a cap for interest deductions for mortgages at $350,000 and employer-provided health insurance at $11,000 annually.

Currently, all interest on a mortgage up to $1 million is tax deductible. The panel would restrict it to $350,000. While this would affect most home buyers in many cities (Washington, DC, median home price for the Q2 2005=$429,200), this would probably dampen the giant increases in the future (median price rose 26.2% in one year; that's a $100,000 gain in 12 months) as mortgage deductions distort the price buying a home. Much like school tuition rises as federal student loans grow (yes, tuition increases are caused by increased federal aid to students), taxpayers have been, in effect, subsidizing expensive houses. A cap at $350,000 would keep the incentive for families to own a home but recoup tax dollars that would otherwise have to come from income taxes.

Likewise, the panel recommends stopping the deduction for employer-based health insurance at $11,000 annually. This too will discourage overconsumption and still maintains a reasonable exemption to encourage insurance coverage.

These are very reasonable recommendations that deficit-worried conservatives and tax-happy, wealth-hating liberals should be able get behind. The President and Congress do not have to act on the panels conclusions, but it would go a long way toward repairing the rift with fiscal conservatives if Republicans were wise about taking modest steps towards deficit reduction.

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