UPDATE 1-Romney's remarks on limiting tax deductions draw fire

Mon Apr 16, 2012 7:10pm EDT

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By Sam Youngman and Donna Smith

WASHINGTON, April 16 (Reuters) - Was it case of a politician being candid behind closed doors? Or was he merely leading a provocative discussion of tax proposals?

Those were the questions surrounding U.S. Republican Mitt Romney's presidential campaign on Monday, after he was overhead telling supporters at a private fundraiser in Florida over the weekend that he might seek to limit tax deductions for mortgages and eliminate the Department of Housing and Urban Development (HUD).

By Monday, Romney's campaign was scrambling to distance him from the comments, overheard by reporters from NBC News and the Wall Street Journal. And Democratic President Barack Obama's campaign - which has tried to cast Romney as having secret plan that would hurt the middle class - had found a new episode to drive that narrative.

During a conference call, aides said Romney he was simply throwing out ideas, not outlining policy when he said he would combine or eliminate many government departments, agencies and tax credits to help offset his proposal to slash all U.S. tax rates by 20 percent.

While not especially specific, Romney's comments did go much further in describing his plans than what he has outlined in public campaign appearances.

Romney told donors he would eliminate or limit the mortgage-interest tax deduction for second homes for those with high incomes, and probably would do the same for the state income-tax and state property-tax deductions now taken by millions of Americans, the Wall Street Journal reported.

Romney aides said he was merely responding to questions offering suggestions during the fundraiser.

"He's entitled to, I think, focus on the ideas he's actually proposed," said Jim Talent, a former Missouri senator and frequent Romney surrogate told reporters on the conference call.

The Obama campaign and the Democratic National Committee, used Romney's comments to the conservative crowd in Florida to question his credibility.

Romney "has a credibility problem that is leading to a lack of trust across the political spectrum," said Ben LaBolt, Obama's spokesman at the campaign's Chicago headquarters.

LaBolt and other Obama supporters said Romney's comments at the fundraiser - and his backtracking once they became public - were a sign that the former Massachusetts governor would say anything to win the Nov. 6 election.

WARNINGS ON TAX DEDUCTIONS

In Washington and beyond, Romney's comments set off discussions - and warnings - about the potential cost and impact of the tax measures he suggested.

Lawrence Yun, chief economist with the National Association of Realtors, said limiting the second home mortgage deduction was a "terrible idea."

Yun, whose group opposes any change in home mortgage interest deductions, said at most, such a move would raise about $5 billion a year in additional tax revenue but could hurt home sales. It "would be a terrible signal to send out there" just as the housing market is trying to recover, Yun said.

U.S. congressman Sander Levin, the ranking Democrat on the House Ways and Means Committee, said a proposal "to eliminate the deductibility of property taxes is particularly reckless as we emerge from a housing-led recession.

"Because the value of the deduction is generally understood to be capitalized into the price of housing," Levin said, "eliminating the deduction risks a widespread drop in housing prices, further damaging fragile markets."

Cutting the mortgage deduction for second homes for all income groups could raise about $8 billion a year, according to an estimate by the Tax Policy Center.

Romney's floated proposal, because it would apply to high-earners only, therefore would raise less.

Economists across the spectrum would agree to kill that tax benefit, according Will McBride, an economist with the conservative-leaning Tax Foundation. "Every tax policy organization and economist agrees on that, except the few who are in the pay of the housing lobby," he said.

Congressional Republicans floated a similar idea last year in talks to cut the deficit, but a top Republican aide said it likely would be considered only in the context of broader tax changes.

Killing deductions for state and local income taxes probably would draw opposition from governors, many of whom are Republicans, according to Howard Gleckman, a scholar at the Tax Policy Center. "Every governor is completely terrified of losing the state and local tax deduction," Gleckman said.

The tax break, when applied for all income groups, is the country's fourth largest, and is estimated to cost the federal government $450 billion over five years, according to an estimate by the Democratic Center for American Progress.

TARGETING HUD, DEPARTMENT OF EDUCATION

Others focused on Romney's suggestions that he might eliminate HUD, raising questions about whether a Romney administration would target housing subsidies such as those the agency provides to low-income families.

HUD once was led by Romney's late father, George Romney.

"Things like Housing and Urban Development, which my dad was head of, that might not be around later," Romney told the Palm Beach crowd, according to NBC. "But I'm not going to actually go through these one by one. What I can tell you is, we've got far too many bureaucrats. I will send a lot of what happens in Washington back to the states."

Romney also told the Florida crowd he might reorganize the Department of Education, and said he realized the political perils of trimming the agency during his failed run for a U.S. Senate seat in 1994.

"The Department of Education: I will either consolidate with another agency, or perhaps make it a heck of a lot smaller. I'm not going to get rid of it entirely," Romney added. He explained that part of his reasoning behind preserving the agency was that it played a role in pushing back against teachers' unions, according to NBC.

Romney discussed campaign strategy during the Florida meeting, saying Republicans will need to woo Hispanics, who represent more than 20 percent of the voting population in many important swing states.

Polls indicate that Hispanics favor Obama over Romney by large margins. (Additional reporting by Patricia Zengerle; Editing by David Lindsey and Christopher Wilson)

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