Fiscal Commission Fails to Garner Enough Votes for Final Report

In a portentous disappointment yesterday, the New York Times reports that the National Commission on Fiscal Responsibility and Reform voted 11-7 in favor of the report it released on December 1 but failed to gather the fourteen votes necessary to send the proposal to Congress for a vote.[1]

The Commission had eighteen members, six appointed by the President, twelve appointed by Congress, six from each chamber, split equally among the two parties. The President's appointees voted 5-1 for. At that rate, if the President had chosen all the members of the Commission, the plan would have probably passed. But the President doesn't vote in Congress, and Congress is the branch that will have to create the laws to implement the reform, and of course, the dissension on the panel came from among Congress's twelve appointees, six from each chamber, split equally among the two parties. Congress's total representation split down the middle, 6-6. The parties likewise both split down the middle, 3-3, but the two chambers did not. Like the President's appointees, the Senate appointees voted 5-1 for, but the House appointees, however, voted 5-1 against.

Notes

[1] The only reference to fourteen votes in the Executive Order creating the Commission is Section 5(b), which says, "The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission." Thus, "final report" appears to be some sort of term of art meaning the proposal of a President's commission that it submitted to Congress for consideration.

Fiscal Commission Proposal to Reform the MID Has Favorable Polling

As a part of its package to put the federal fiscal house in order, the President’s National Commission on Fiscal Responsibility and Reform is proposing to reform the mortgage-interest deduction (“MID”), White House, The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform 31 (2010) [hereinafter The Moment of Truth], a device in the federal income tax that allows some individuals to deduct with some limits the amount of the interest they pay on their mortgage from their taxable income, see Internal Rev. Service, Publication 936: Home Mortgage Interest Deduction (2009), and that is designed to increase homeownership in the United States, see Roger Lowenstein, Who Needs the Mortgage-Interest Deduction?, The New York Times, Mar. 5, 2006.

The MID is associated with a number of well known problems. Most fundamentally, as recapitulated in a recent Urban Institute report, the MID doesn’t actually increase homeownership in any meaningful amount. Eric Toder, et al, Urban Institute, Reforming the Mortgage Interest Deduction (2010) [hereinafter Urban Institute Report]; see also Christian A.L. Hilber and Tracy M. Turner, The Mortgage Interest Deduction and its Impact on Homeownership Decisions (2010). The evidence from the United States and abroad has consistently found little-to-no correlation between the MID and homeownership levels. Id. at 3. In the United States, this occurs because only some homeowners can take advantage. In order to take the MID, the homeowner must itemize their deductions instead of taking the standard deduction, Publication 936, supra, at 1, in the hope that the total amount of their deductions itemized, including the MID and others, will exceed the standard deduction, and thus lower their taxable income more than the standard deduction would. See Internal Rev. Service, Publication 501: Exemptions, Standard Deduction, and Filing Information 25 (2009). Higher-income taxpayers are much more likely than lower-income taxpayers to itemize their deductions, Urban Institute Report, supra, at 3, as you have to have a certain amount of income in order to spend enough money and exceed the standard deduction; furthermore, the benefits of the MID accrue proportionately to income (the more income you make, the larger the tax break); and of course, the more income you make, the more likely you are to be able to own a home regardless of tax structure: thus, “[b]ecause most who benefit [from the MID] would own homes without the deduction, [the MID] mostly provides an incentive to live in more expensive homes, not to own instead of rent,” id. at 2. The Urban Institute report concludes that a tax credit, instead of a deduction, for all homeowners, not just those who itemize their deductions, would better serve the policy of increasing homeownership, if that policy is to be served at all, id. at 16.

Beyond a failure of purpose, a few other defects are worth mentioning.[1] By adding yet another line item to already overwhelming tax forms, the MID makes income taxes more complex, and, according to the Taxpayer Advocate, complexity is currently the most serious problem in the federal tax code. Taxpayer Advocate Service, 2008 Annual Report to Congress 3 (2008). In addition, because its benefits correlate positively to income, the MID is considered to be a regressive tax. See Alexander Hart, Is the Mortgage-Interest Deduction Really a Middle-Class Tax Break?, The New Republic, Nov. 16, 2010 (discussing the Urban Institute Report); Ezra Klein, Who Does the Mortgage-Interest Deduction Benefit?, The Washington Post, Nov. 16, 2010 (graphing the Urban Institute Report). And finally and perhaps most importantly, for being a failure of policy, the MID is very expensive, currently the single most costly tax-expenditure subsidy in the federal budget, and the Joint Committee on Taxation estimates that it cost the Treasury $86.4 billion in 2009 and will cost $134.7 billion in 2013. Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2009-2013 33 (2010); Jeanne Sahadi, Mortgage Deduction: America’s Costliest Tax Break, CNN Money, Apr. 15, 2010.

In its report, the Commission offers a reform to deal with the problem. It decides, implicitly, that promoting homeownership is a policy worth serving, proposes to change the deduction into a credit for all homeowners, but scales back the benefits and cost of the credit, The Moment of Truth, supra, and puts the savings both to cutting the deficit as well as lowering the overall income-tax rate, id. at 30.

The Commission is not the first to consider reforming the MID. The problems associated with it are well known, and sensible economics has wanted to kill it off for sometime now, but the MID has traditionally been considered an untouchable tax policy, one so important to so many interests and constituencies as to be beyond reform or repeal. See Edward L. Glaeser, Killing (or Maiming) a Sacred Cow: Home Mortgage Deductions, The New York Times, Feb. 24, 2009; Edward D. Kleinbard, Sacred Tax Cows: It’s Them or Us, Huffington Post, Aug. 10, 2010.

The Obama administration’s recent rebuffed attempts at reform are illustrative. In its 2010 budget proposal, the administration proposed limiting the MID for upper-income Americans in order to pay for health-care reform. Office of Management and Budget, A New Era of Responsibility: Renewing America’s Promise 29-30, 123 (2009); Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals 75 (2009); Laura Meckler, $318 Billion Tax Hit Proposed: Upper-Income Americans Would See Deductions Cut on Charity and Mortgage Interest, The Wall Street Journal, Feb. 26, 2009, at A1. Congress rejected this proposal by explicitly omitting it from its fiscal year 2010 budget resolution, S. Con. Res. 13, Title V, Section 501, at 41-42 (2009); Congress Omits Limiting Mortgage Interest Deduction, Nation’s Building News, week of May 4, 2009 (viewed on Nov. 20, 2010), and then by declining to include it as a revenue offset in its ultimate health-care reform act, see The Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119, 847-83 (2010). In its 2011 budget proposal, the administration again proposed limiting the MID and other deductions. Office of Management and Budget, Budget of the U.S. Government: Fiscal Year 2011 40, 168 (2010); Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals 129 (2010); Martin Vaughan, Tax Cuts to Expire for Top Earners, The Wall Street Journal, Feb. 2, 2010. As with the 2010 budget, the proposed limitation went nowhere in Congress. See James R. Hagerty, Bid to Curb Mortgage Tax Break Falters, The Wall Street Journal, Mar. 1, 2010.

While recent experience isn’t promising for reform, surprise data suggests that the MID might not be untouchable after all. A recent poll found a majority favoring eliminating the MID to help cover the deficit and lower income-tax rates. Alan Fram and Jennifer Agiesta, AP-CNBC Poll: Deficit-Cutting Ideas Not Popular, Associated Press, Nov. 30, 2010. When the first two attempts at reform by the Obama administration were rebuffed, they were rebuffed by Congress. Ultimately, considering the extraordinary weight of the issues involved, it is the American people who are going to have to decide how to fix the deficit, and the poll above suggests, contrary to conventional wisdom, that the MID could be ready for reform.

Notes.

[1] It's worth putting in a footnote to the paragraph on defects that the MID didn't cause the subprime mortgage crisis. If lower-income homeowners, the most likely to be subprime borrowers, don't take the deduction, then the deduction can't have driven them to buy the home they couldn't afford in the first place.

Fiscal Commission Releases Report: "The Moment of Truth"

The President’s National Commission on Fiscal Responsibility and Reform released its report yesterday, entitled, appropriately, “The Moment of Truth.” A national train wreck is coming. It’s happening, right now. The processes are already at work all around us, if only by default. Assuming that the structural imbalance of revenues and expenses in the federal budget are not brought back into line and soon, the net present value of the United States government over the next 75 years is -$89 trillion. Gov’t Accountability Office, The Federal Government's Long-Term Fiscal Outlook 7 (2010) (GAO-11-201SP). In other words, if we were to do nothing to change our situation and tame the deficit, we would need $89 trillion dollars in cash today in order to meet the current promises for tomorrow. This is a number so large that it lacks meaning. Something must be done, and the report is at the very least a good first step in the right direction. If you want to understand the gravity of what’s happening to us and what it’s going to take to cope, check it out.