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White House Rethinks Tax Hikes
SOURCE: The Wall Street Journal
John D. McKinnon and Martin Vaughan
March 05 2009

WASHINGTON -- President Barack Obama is meeting strong Democratic Party resistance to his proposal to reduce tax deductions enjoyed by upper-income Americans and could be forced to drop or modify the idea.

Mr. Obama in his budget blueprint last week proposed a cap on itemized deductions for mortgage interest and charitable donations to help pay for his health-care overhaul. The plan would cost wealthier taxpayers about $318 billion in new taxes over 10 years, according to government estimates.

But after objections from Democratic lawmakers, Treasury Secretary Timothy Geithner appeared to suggest at one point Wednesday that the administration was willing to consider dropping or modifying the proposal.

View Full Image Senate Finance Committee Chairman Max Baucus (D., Mont.), left, and Treasury Secretary Timothy Geithner Getty Images

Senate Finance Committee Chairman Max Baucus (D., Mont.), left, and Treasury Secretary Timothy Geithner before a budget hearing Wednesday. Senate Finance Committee Chairman Max Baucus (D., Mont.), left, and Treasury Secretary Timothy Geithner Senate Finance Committee Chairman Max Baucus (D., Mont.), left, and Treasury Secretary Timothy Geithner

The resistance from Mr. Obama's own party -- focusing on a single element of the president's tax plans -- could foreshadow broader troubles for the rest of his proposed tax increases.

Republicans have already taken aim at rate increases planned for higher-income earners, as well as the administration's plans to raise hundreds of billions of dollars through climate-change legislation.

During two days of congressional hearings on the Obama budget blueprint this week, Democrats added their own concerns.

Sen. Max Baucus (D., Mont.), the Senate's top tax writer as chairman of the Finance Committee, told Mr. Geithner he was especially concerned about paying for expanded health coverage with a deductions curb that "has nothing to do with health care." He added: "I'm wondering about the viability of that provision."

"We recognize there are other ways to do this," Mr. Geithner responded during a hearing Wednesday. "We are willing to listen to all ideas that meet these broad principles."

Some lawmakers questioned whether it was smart to reduce mortgage-interest deductions in the midst of a housing-market crisis.

"Isn't there a concern that limiting the deduction would further depress home prices?" Sen. Pat Roberts (R., Kan.) asked during the hearing.

Charitable organizations are also worried. Indiana University's Center on Philanthropy said Wednesday that Mr. Obama's proposals to limit deductions and raise rates, if applied in 2006, would have reduced giving by nearly $4 billion, or 2.1%.

"I'd like to think that people give out of the goodness of their heart, but that tax deduction helps to loosen up the heartstrings," Nevada Democratic Rep. Shelley Berkley said Tuesday during a House Ways and Means Committee hearing.

Mr. Baucus said the administration should look instead for ways of covering the cost of health-care reform by finding more savings within the health-care system. He suggested limiting the tax advantages of employer-provided health care.

Mr. Geithner said the proposal on limiting deductions was intended to underscore the administration's credibility in fighting the deficit, and "to make sure the people understand that we need to do this in a way that's broadly fiscally responsible."

Still, Mr. Geithner repeatedly defended the proposal, saying it affects only about 1.2% of taxpayers. He added it would have only a modest negative impact on overall charitable giving. The Treasury secretary also noted that none of the administration's tax increases would go into effect until 2011 -- presumably after an economic recovery is well under way.

The Obama plan would cap the value of deductions for families making $250,000 and up. Under current law, a $1,000 deduction is worth up to $350 for such taxpayers, because they can avoid tax rates of up to 35% on that income. The Obama cap on deductions would make the $1,000 deduction worth a maximum of $280.

Mr. Geithner also faced questions from lawmakers about how Mr. Obama's plan to let the top two tax rates increase to 39.6% and 36% in 2011 would impact small businesses. Republicans challenged Mr. Geithner's assertion that those increases wouldn't affect 97% of small businesses, saying the tax increases would put a new burden on businesses that create jobs.

Another Democrat, Sen. Maria Cantwell of Washington, questioned why the administration wouldn't look for savings in the tax code through a comprehensive overhaul. "Why not look at a broader approach to tax policy, [rather] than coming in with this proposed change to marginal rates?" Ms. Cantwell said.

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