Closing Tax Loopholes Easier In Theory Than In Political Practice : It's All Politics Republicans want to raise revenue by closing loopholes in the tax code instead of by raising rates. But tax breaks like the charitable deduction and the mortgage interest deduction come with interest groups willing to fight tooth and nail for them.
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Closing Tax Loopholes Easier In Theory Than In Political Practice

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Closing Tax Loopholes Easier In Theory Than In Political Practice

Closing Tax Loopholes Easier In Theory Than In Political Practice

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One man's loophole is another's vital economic incentive, so closing them is easier said than done. On Wednesday, for instance, hundreds of nonprofit leaders will be on Capitol Hill lobbying to protect tax breaks for charitable contributions.

And NPR's Scott Horsley reports there is sure to be more of that, as lawmakers pursue what they call tax reform.

SCOTT HORSLEY, BYLINE: Closing tax loopholes is one way to bring the federal budget closer to balance. But it could poke a hole in a lot of household budgets. Just ask Luke Lackrone. The software manager was shocked two years ago, when his family moved from Arizona to Maryland and he found a modest three-bedroom townhouse costs $450,000.

LUKE LACKRONE: It's nice. It's comfortable. But, you know, it's not like we're just swimming in space or we have, you know, a swimming pool or something like that.

HORSLEY: The Maryland house did come with one extra feature: a pretty hefty property tax bill.

LACKRONE: Property taxes for my home in Maryland, they're four times what they were in Phoenix.

HORSLEY: Still, Lackrone took some comfort in knowing he could write off both his property taxes and his mortgage interest every year when he files his federal tax return. Those deductions were a big part of making his home purchase pencil out.

LACKRONE: You know, our overall monthly payment will be this number. But it's really like it's much less because we get that tax benefit for all the interest. It was absolutely a part of our decision-making.

HORSLEY: That's why Lackrone worries when he hears politicians talk about limiting tax deductions.

While Democrats are intent on raising the top income tax rates, arguing the wealthy can afford to pay more, congressional Republicans insist the government should leave rates alone and raise money, if it must, by closing tax loopholes. The GOP does have some economic rationale.

Bob Williams, of the non-partisan Tax Policy Center, says in theory it makes sense to keep tax rates low while minimizing deductions and other loopholes.

BOB WILLIAMS: Lower rates and broader base means less distortion, less tax influencing how the economy comes out.

HORSLEY: One could argue, for example, that the mortgage interest deduction simply encourages people to go deeper in debt and buy more house than they otherwise would. Most tax breaks are designed to encourage some kind of behavior, whether it's owning a home or giving to charity. Once enshrined in the tax code, those breaks are mighty hard to get rid of.

Non-profit leaders will be storming Capitol Hill this week, fighting any attempt to whittle away at the deduction for charitable giving.

DIANA AVIV: People are saying to us, stand from the highest treetop and yell that this is going to hurt the people that we serve.

HORSLEY: Diana Aviv heads Independent Sector, an umbrella group for the nation's charities.

AVIV: The charitable deduction is likely to be the first one on the chopping block by individual's choice. People give, but they give more generously because they're incentivized to give. If they're not incentivized to give, they'll give less.

HORSLEY: The centrist Democratic group Third Way tried to avoid this kind of hostile reaction when it proposed its own cap on itemized deductions. Vice President Jim Kessler says the group deliberately left the tax break for charities alone.

JIM KESSLER: You don't want every charitable organization from the New York City Ballet to your local soup kitchen and the Catholic Church opposing it.

HORSLEY: But charities aren't the only ones on alert. The National Association of Realtors is keeping its powder dry for the moment, but says it will be vigilant in opposing any effort to limit the mortgage interest deduction.

There is a lot of money at stake. The Tax Policy Center says capping deductions at $25,000 per household would bring in more than a trillion dollars over a decade. More than a third of that extra revenue would come from people making less than $250,000.

White House spokesman Jay Carney says that's a problem with the GOP approach.

JAY CARNEY: You cannot get the kind of revenue that you need simply from capping deductions or closing loopholes, without taxing the heck out of the middle class, and that's unacceptable for the president. Or without ending the charitable deduction or doing other things that would never fly on Capitol Hill, for good economic, as well as political reasons.

HORSLEY: Still, Mr. Obama also wants to raise more than half-a-trillion dollars by liming tax breaks only for the wealthiest families, so some adjustment to popular deductions is likely to be part of any eventual budget compromise.

Luke Lackrone, who's still adjusting to Maryland's high-priced real estate, says he'd be willing to pay higher income taxes. Just don't mess with his mortgage interest deduction.

Scott Horsley, NRP News, Washington.

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