KY Policy Blog

Federal Limit on Tax Expenditures Would Generate Needed Revenue and Make Taxes Fairer

By Anna Baumann
April 30, 2013

President Obama’s proposal to limit tax savings on itemized deductions and exclusions for high-income people would raise more than half a trillion dollars over the next decade while increasing taxes for only 1.9 percent of Kentuckians, according to a new report released today by Citizens for Tax Justice (CTJ).

The tax expenditures President Obama proposes to limit give the biggest tax breaks to the wealthiest individuals. For example, 77 percent of the benefit of the mortgage interest deduction goes to homeowners with incomes above $100,000.

That’s because for each dollar that high-income taxpayers in the 33, 35, and 39.6 percent federal income tax brackets deduct from their taxes, they save 33, 35, or 39.6 cents, respectively. Middle-income people are in lower tax brackets, and thus save only 15 or 28 cents for each dollar of deductions. Also, many low- and middle-income people take the standard deduction, and so don’t benefit at all from the ability to claim deductions.

The proposed legislation would limit savings to 28 cents per dollar on some deductions and exclusions. The average tax increase of those affected by the proposal would be less than one percent of their income.

Nationwide, 3.6 percent of taxpayers would see their taxes go up. As a relatively poor state, even fewer Kentuckians are affected. In Kentucky and three other states, just 1.9 percent of taxpayers would pay more. The only states with a smaller portion of tax filers whose federal marginal tax rates surpass the 28 percent limit are Arkansas and West Virginia (1.6 percent), and Idaho and Mississippi (1.7 percent), while the District of Columbia has the highest portion (8.9 percent).

As CTJ outlines in the report, two thirds of the plan’s overall savings come from limiting three particular deductions: state and local taxes (36 percent), charitable donations and mortgage interest (15 percent each).

Some charities have voiced concern that limiting charitable deductions would significantly decrease donations, but research indicates that the effect would be quite modest. To begin with, Obama’s proposed limit preserves a large marginal incentive to give – in other words, taxpayers save 28 cents on each additional dollar they give. And insofar as donors are motivated to give by factors in addition to tax incentives such as altruism, religious belief and social ties, they will continue to give robustly.

Tax breaks drain revenue from investments in schools, health care and infrastructure. In all, the federal government spends $1.1 trillion a year on tax expenditures—more than it spends on Social Security or on Medicare and Medicaid combined. Limiting deductions can help the country better pay for the services it needs by asking more of those Americans who can afford it the most.

Comments are closed.