The taxes paid deduction: another tax subsidy worth ending 

Yesterday 34 of 47 Republicans voted to end $6 billion in tax subsidies for ethanol producers. By itself, this vote would have put those 34 Republicans in violation of the Americans for Tax Reform Tax Payer Protection Pledge. While ATR did not consider yesterday's vote a violation of the pledge (Philip Klein reports that ATR let seantors off the hook since, theoretically, senators could have later voted for another amendment cutting other taxes) the measure's sponsor, Sen. Tom Coburn, R-Okla., sure did. His spokesman told Klein: "ATR is obviously embarrassed they were rebuked by 34 pledge signers, Koch Industries and the Club for Growth. They don’t have the courage to call this group tax hikers. It’s time for ATR to stop defending gratuitous tax earmarks."

Might this ethanol vote open the door to more conservative efforts to simplify the tax code? It is not hard to find critics of the mortgage interest deduction on either the right or the left. It was even in the Bowles-Simpson deficit reduction plan. And President Obama has repeatedly gone after charitable deductions.

But as the Mercatus Center's Veronique de Rugy reminds us today, there is another big ticket income tax deduction that could lead to significant more revenues for the federal government if it was closed:

Deductions in the second largest category, noted above as “taxes paid”, account for $467.2 billion in foregone income tax revenue. 62% of these deductions were state and local income and sales taxes paid, 36% of these deductions were due to real estate taxes, and the remaining 2% of deductions in this category were due to personal property taxes and other taxes paid.

The $467.2 billion in annual foregone government revenue from the "taxes paid" deduction is less than $497.6 billion lost through the mortgage interest deduction. But it is significantly more than the $172.9 billion foregone in charitable deductions. So why does Obama pick on charities but not the "taxes paid" deduction? Because the lion's share of the benefits of this tax break go to his wealthy liberal base.

Just look at these charts from the Tax Foundation on the states with the highest income tax and the counties with the highest real estate taxes. They are all deep blue states and counties.

No wonder you never hear Democrats calling for the end of this tax loophole.

The case against ending the taxes paid subsidy is a lot weaker than it is against getting rid of the mortgage deduction. Anybody can buy a big house and enjoy that tax advantage. But only citizens of deep blue/high tax states can take advantage of the taxes paid deduction. Texas citizens who pay no income tax are effectively subsidizing tax breaks for California millionaires. Also, at the margins, the taxes paid deduction only encourages highers taxes at the state and local level.

If it meant some big spending cuts and some real Medicaid reforms, could conservatives live with the end of the taxes paid deduction?

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Conn Carroll

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