WASHINGTON – Millions of taxpayers who take advantage of deductions for mortgage interest, charitable donations and state and local taxes would be targeted for potential tax hikes under a GOP plan to raise taxes by $290 billion over the next decade to help reduce the nation’s deficit.
Some workers could also see their employer-provided health benefits taxed for the first time, though aides cautioned that the proposal is still fluid.
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The plan by Sen. Pat Toomey, R-Pa., who serves on the 12-member debt supercommittee, would raise revenue by limiting the tax breaks enjoyed by people who itemize their deductions, in exchange for lower overall tax rates for families at every income level. Taxpayers who already take the standard deduction instead of itemizing — about two-thirds of filers — could see tax cuts. The one-third of taxpayers who itemize their deductions might pay more.
The top income tax rate would fall from 35 percent to 28 percent, and the bottom rate would drop from 10 percent to 8 percent. The rates between would be reduced as well.
About 50 million households itemized their deductions in 2009, according to the nonpartisan Joint Committee on Taxation. About 35 million households claimed the mortgage interest deduction, and 36 million deducted charitable donations. Nearly 41 million claimed deductions for paying state and local taxes.
A GOP congressional aide said the plan is designed to raise taxes on households in the top two tax brackets. That would affect individuals making more than $174,400 and married couples making more than $212,300.
Some Republicans say the plan offers a potential breakthrough in deficit-reduction talks that have stalled over GOP opposition to tax hikes and Democrats’ objection to cuts in benefit programs without significant revenue increases.
Democratic and Republican members of the supercommittee met separately Thursday, with no sign of progress.
Republicans are becoming increasingly divided over the issue of raising taxes. A growing number of GOP lawmakers say they’d support a tax reform package that increases revenues, if it is coupled with spending cuts to reduce the deficit about $4 trillion in 10 years.
The so-called “go big” strategy has been endorsed by a bipartisan group of about 150 lawmakers from the House and Senate. A rival group of 72 House Republicans sent a letter to the supercommittee Thursday, urging members to oppose tax hikes.
Democrats have panned Toomey’s plan, saying the rate reductions would cut taxes for the wealthy so much that taxes on the middle class would rise, and that the plan would generate less revenue than advertised.
Republicans say Toomey’s tax overhaul plan would increase tax revenue by $290 billion over the next decade.
The supercommittee has until Wednesday to come up with a plan to reduce government borrowing by at least $1.2 trillion in 10 years. If it fails, $1.2 trillion in automatic spending cuts to domestic and military programs would take effect in 2013.
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