* Cutting tax breaks weighed to offset lower top tax rate
* Backers might seek to reduce top rate to 25 percent
* Mortgage interest and 401(k) deductions eyed
By Donna Smith
WASHINGTON, May 14 It has been nearly 20 years
since President George H.W. Bush lost his bid for re-election
after making a "no new taxes" pledge, and then agreeing to raise
taxes. Since then, Republicans have not touched hundreds of tax
breaks in U.S. tax laws, fearing that doing so could be called a
That could be changing.
They're not advertising it, but Republicans in Congress,
along with a few Democrats, are exploring the idea of limiting
or ending some of Americans' most sacred tax breaks. They
include deductions on contributions to 401(k) retirement
accounts and possibly those on home mortgage interest, each of
which save millions of Americans thousands of dollars each year.
As was the case nearly six months ago when a bipartisan
congressional "super committee" couldn't agree on how to trim
more than $1 trillion from the federal deficit, the Republicans
are doing so with a bigger goal in mind.
They want to limit the deductions to help pay for their plan
to lower the top federal tax rate from 35 percent - most likely
to the 25 percent called for in the House Republican budget plan
crafted by Wisconsin Representative Paul Ryan, and endorsed by
presumed Republican presidential nominee Mitt Romney.
"It's a full review of the tax code, including all of the
credits, deductions, exemptions and loopholes," said a senior
House Republican aide who is not authorized to comment publicly.
Tax writers are warning colleagues that although not every tax
break has to go in order to lower rates, "you have to touch a
lot of things," the aide said.
It all would be part of a Republican strategy to lower
overall tax rates while getting some of the roughly 45 percent
of Americans who now pay no income taxes to start paying. Most
of those people aren't required to pay because they are poor, or
are able to claim enough deductions to eliminate their tax
Such a scenario is a non-starter to most Democrats,
including those who control the Senate.
Democratic leaders say that although it's unclear precisely
how such a plan would affect each taxpayer, it almost certainly
would unfairly squeeze the middle class, have little impact on
reducing a federal debt expected to top $16 trillion this year,
and become a giveaway to the wealthy.
Even so, House Republicans are vowing to shape the budget
debate by pressing ahead with their version of tax reform.
They're hoping that the Nov. 6 elections will help put their
budget plans in play by putting Romney in the White House,
maintaining their majority in the House and perhaps giving them
control of the Senate.
For Republicans seeking the most significant overhaul of the
U.S. tax code since 1986, Ryan's budget plan has brought on a
sense of urgency in part because it does not identify how to pay
for what analysts say would amount to more than $4 trillion in
tax revenue that would be eliminated over the next decade.
That doesn't include the multibillion-dollar budget hole
that would be created if Republicans succeed in extending
Bush-era tax cuts that are scheduled to expire at the end of the
With those numbers in mind, House Ways and Means Chairman
Dave Camp of Michigan has been talking with fellow Republicans
and Democrats about which long-term tax breaks could be cut back
The list of money-saving deductions that could be targeted
to try to make Ryan's budget work is long.
Among the deductions that Camp's committee is examining
are those that Americans enjoy for contributions to 401(k) and
other retirement savings accounts. For 2012, tax-free
contributions to 401(k) plans are limited to $17,000 (or $22,500
for those age 50 and older), but withdrawals are taxed.
Tax breaks for retirement savings cost the federal treasury
nearly $84 billion a year, according to the Congressional
Camp said that early estimates of the cost of lowering the
overall tax rate to 25 percent suggest that "you don't have to
eliminate all deductions" to make it work. "You will be able to
keep some" deductions.
Between now and the Nov. 6 election, "we'll see a lot of
brave talk" about going after popular deductions and trimming
tax rates, said Steve Bell, a former senior Senate Budget
Committee Republican staff member who is now with the Bipartisan
Policy Center. "But I expect nothing in specifics" before the
Republicans' move to rewrite the U.S. tax code is likely to
cause divisions within the Republican Party, where conservative
Tea Party activists see spending cuts and shrinking the
government bureaucracy - rather than revenue-raising measures
that could lower families' after-tax income - as the ways to
deal with mounting deficits.
There appears to be growing flexibility among some
Republicans as the government's dire financial situation becomes
Even influential anti-tax activist Grover Norquist - whose
Americans for Tax Reform has gotten the vast majority of
Republicans in Congress to agree to oppose tax increases or
limits on deductions that would cost taxpayers - has said he
would accept the idea of reduced deductions in exchange for
lower tax rates.
"Some people are willing to allow revenues to go a little
higher if the (tax) rates come down, some people are not willing
to let the revenues go higher, some people are willing but not
saying it," said Alex Brill, a former senior Republican staff
member of the tax-writing House Ways and Means Committee who now
is with the American Enterprise Institute think tank.
Among the tax breaks that are designed to encourage economic
activity the mortgage interest deduction is one of the biggest,
amounting to about $388 billion in deductions for taxpayers last
year. Most lawmakers are reluctant to do away with it, but some
are toying with the idea of limiting it.
In politics, the mortgage deduction is a hyper-sensitive
That was evident last month, after Romney told a group of
supporters that he might support ending or limiting the mortgage
interest deduction on second homes for high-income earners, and
likely would support doing the same for state income and
property tax deductions.
Romney's suggestion would not affect most homeowners, and it
would raise only about $13 billion over 10 years, according to
Congress' Joint Committee on Taxation.
However, his comments sparked an outcry from the National
Association of Realtors, whose chief economist, Lawrence Yun,
said it would send a "terrible signal" to potential home
purchasers that more limits to the home mortgage interest
deduction were coming.
The Realtors group says that eliminating mortgage deductions
of any type could have a broad impact on the U.S. economy by
lowering home values and hurting the housing market just as it
is emerging from the 2007-2009 financial crisis and a wave of
The group said it expects thousands of members to rally at
the Washington Monument on Thursday to call on Congress to
"protect the American Dream" by preserving deductions for