Taxpayers to Obama: Keep your hands off our deductions

In his speech on Wednesday, Barack Obama suggested that eliminating some tax deductions might be necessary to close the budget deficit, at least on a means-tested basis.  Gallup’s latest poll taken after the speech shows the political risk in pushing that idea.  Large majorities support the deductions Obama mentioned in the speech, even when told it would help close the federal budget deficit:

Americans make it clear they want to keep common federal income tax deductions, regardless of whether the proposed elimination of those deductions is framed as part of a plan to lower the overall income tax rate or as a way to reduce the federal budget deficit. No more than one in three Americans favor eliminating any of the deductions in either scenario. …

Budget plans that call for lower overall tax rates, such as the one proposed by Rep. Paul Ryan, would essentially require that popular deductions be eliminated, basically trading off one tax break for another. President Obama’s commission on deficit reduction last December called for eliminating deductions, including the one for mortgage interest, as part of its plan (ultimately rejected) to reduce the federal budget deficit.

The most eye-opening result in the survey is that the home-mortgage deduction actually comes in last among the three mentioned (61%), although it’s nearly a tie with the deduction for state and local taxes (62%).  More than seven in ten people want to keep the charitable-contribution deduction (71%), with only 26% favoring its elimination.  When framed as a deficit reduction measure, support for the state and local taxes deduction drops to 58%, while support for the home-mortgage deduction (60%) and the charitable donation deduction (68%) barely move.

The commitment to these deductions doesn’t rely on personal use, either.  Only 43% claim the mortgage deduction and it still gets 61% support.  Among those who don’t claim interest on their taxes, the deduction gets near-majority support at 49/39, which means elimination isn’t even popular among renters.  Majorities claim deductions in the other two categories, but majorities of the minorities that do not still support the deduction: 62% of those who don’t claim charitable donations, and 52% for those who don’t claim state and local taxes.

Politically speaking, it will be almost impossible to eliminate these deductions, at least when keeping the existing tax system.  Unlike the corporate tax code, people understand their own deductions and how it benefits themselves and the economy without playing favorites or choosing winners and losers.   Cancelling the home-mortgage interest deduction would have a devastating effect on the housing market, which is hardly a beacon of economic health these days as it is.  Charitable organizations would get hurt in an elimination of the deduction, although probably not to the extent the housing market would.  The least defensible of the three would be the state and local taxes deduction, as the federal government probably shouldn’t indemnify taxpayers for those expenses, but convincing people to pay more through closing that deduction will be a difficult task at best.

The only way to get around these popular deductions would be to replace the current system entirely, either with a flat tax that offers no deductions but a much more realistic and transparent tax rate, or with a consumption tax that eliminates income reporting.  Otherwise, for people looking to find revenue in eliminating these deductions — and how much would we find there anyway? — this looks like No Sale.