Slate's Moneybox: Bush's Tax Code Overhaul
NOAH ADAMS, host:
This is DAY TO DAY. I'm Noah Adams.
A presidential panel is set to unveil two proposals for overhauling the nation's tax system. Both of these proposals would abolish what's known as the alternative minimum tax and would substantially limit the mortgage interest deduction. Daniel Gross, financial columnist for the online magazine Slate, says we should be paying special attention here if we live in states with high housing prices and local taxes.
Dan, let's start with the mortgage interest deduction. This is an important one for many Americans.
DANIEL GROSS reporting:
Under current law, if you borrow up to a million dollars to buy a house or buy a second house, you can deduct the interest from your taxable income. They're talking about severely limiting the amount of interest you can deduct, reducing the size of the mortgage to an average of 313,000 nationwide.
ADAMS: And what about local taxes like property taxes? These are currently deductible on federal income tax, but not all states have them.
GROSS: Under current tax law, your property taxes, your state income taxes and if you have local income taxes, like New York City does, all those are deductible from your taxable income as well. And they're talking about getting rid of that as well.
ADAMS: Dan, what is the logic behind the two proposals?
GROSS: They started with the goal of eliminating the alternative minimum tax. That was a tax installed many years ago to ensure that really rich people who have a lot of deductions end up paying their fair share. And over the years it's ended up ensnaring more and more Americans. It's not indexed for inflation, so if you look at the projections, they're saying, you know, within a few years up to 20 million people could be paying the alternative minimum tax. And under the AMT, people start to lose their deductions for property taxes, local taxes, etc. It's a very complicated thing. It's very difficult for people to plan because you never know when you're going to get hit by it or not, and yet it raises a very large amount of money. So in order to get rid of the AMT, they were forced to find ways to increase revenue by closing other deductions and/or loopholes. And the biggest ones out there are the mortgage deduction and the deduction for state and local taxes.
ADAMS: Now you write that these proposed tax code changes would have much more of an impact on the states that voted for John Kerry in the last elections, the so-called blue states. Why is that?
GROSS: If you're talking about getting rid of these deductions for home mortgages and for state and local taxes, the places that will suffer most are places where housing is very expensive and people have to borrow a lot to buy even a starter home, places that have high property taxes and states that have income taxes. These are places like California, New York, Massachusetts. You're talking about blue states.
ADAMS: These are only proposals now. What has to happen? Does Congress take this up? Do people get a chance to object or to applaud these changes?
GROSS: Well, the idea is that Bush would take these proposals, package them into a law that Congress would then pass. But you could expect some pretty stiff opposition from, you know, what I call the real estate-financial complex, the National Association of Home Builders, realtors and pretty much anybody who owns a home or who has bought a home in recent years. The mortgage deduction is a very powerful tool for people who are buying homes; it's a very important part of people's financial planning. And if you eliminate that deduction, it would have the effect of lowering the value of a lot of houses.
ADAMS: Opinion and analysis from Daniel Gross, financial columnist for the online magazine Slate. Thank you, Dan.
GROSS: Thank you.
ADAMS: DAY TO DAY returns in a moment. I'm Noah Adams.