Jeb Bush’s tax plan would offset the lost revenue from lower tax rates partly by taxing blue states and expensive homes.
That is a somewhat hidden feature of his sweeping tax reform proposal, announced Wednesday.
Part of the Republican presidential candidate’s proposal would be to cap deductions that individuals can claim on their tax returns to lower their taxable income.
Bush would cap the total value of such deductions at 2 percent of adjusted gross income. At the same time, he would roughly double the current standard deduction, a move that would greatly reduce the number of people who would itemize their deductions.
On top of that, Bush would eliminate the deduction for state and local taxes.
Together, those changes would erase or reduce many of the incentives or distortions in the tax code. In particular, it would make spending by state and local governments more expensive to fund and borrowing for big houses more costly for homeowners.
“As it relates to the local and state deductions that have benefited big government states for a long while, why should a state like Florida or Texas or many other states subsidize states that have never really challenged how they go about their business,” said Bush, who ranks second in the Washington Examiner’s presidential power rankings, on the Hugh Hewitt radio show Thursday. “They basically have been captured by the public service unions, and that cost is born by all of us. I just don’t think that’s fair.”
Bush’s plan would curtail the mortgage interest deduction, the largest tax expenditure that is a deduction. Available for interest payments on home loan balances up to $1 million, it is expected to reduce government revenues by $75 billion this fiscal year, providing the biggest benefits to high earners.
It’s among the most popular deductions, however, making it politically difficult to limit.
Bush’s plan would do so in a way that “makes political sense,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonprofit group that advocates deficit reduction.
MacGuineas, with former Reagan economic adviser and Harvard economist Martin Feldstein, previously published a paper suggesting capping tax expenditures at 2 percent of adjusted gross income.
By capping all tax breaks rather than cutting individual ones, MacGuineas said, Bush’s proposal “really just decreases the value of all of them and doesn’t have to do as much picking and choosing.”
Nevertheless, by limiting the measure to just deductions, Bush avoids taking on some of the biggest tax breaks that are not structured as deductions. Those include the employer-provided health insurance, contributions and earnings in retirement plans, and the child tax credit.
Expanding the cap on tax breaks could bring Bush’s tax plan closer to revenue neutrality, MacGuineas noted. Currently, different estimates have suggested that the plan would lose $1.4 trillion to $1.6 trillion for the Treasury Department, even assuming that the rate reductions and simplification of the code stoked faster economic growth.
