by Wilhelmina A. Leigh, Ph.D.
The Budget Control Act of 2011 (P.L. 112-25), signed into law on August 2, 2011, mandates that a Joint Select Committee on Deficit Reduction be constituted (with 12 members of Congress) to identify ways to cut $1.5 trillion from the federal budget over the next 10 fiscal years (2012-2021). The available options for achieving this goal are reducing spending, increasing taxes, and reducing tax expenditures. While it is usually straightforward to determine who will bear the brunt of proposals to cut spending or raise taxes, it is more difficult to make this determination with proposals to reduce tax expenditures.
Tax expenditures are the deductions, exemptions, or credits allowed via the U.S. tax code to subsidize certain politically and socially desirable activities. These expenditures primarily benefit individuals with higher incomes. However, choosing to reduce the federal budget by paring the most costly tax expenditures is likely to have undesired consequences for lower-income populations and for African Americans and Latinos, two groups who are disproportionately low-income.
The two most costly tax expenditures are the exclusion from taxation of employer contributions for medical insurance premiums and for medical care and the deductibility from individual income of mortgage interest paid on owner-occupied homes. According to the Office of Management and Budget, between fiscal years 2011 and 2015, these tax expenditures are projected to account for $1.7 trillion in forgone revenue—$1.05 trillion from the exclusion of medical premiums and $0.64 trillion from the deduction of mortgage interest.
Removing or reducing the tax advantage of employer-sponsored medical insurance could reduce the likelihood that workers have health insurance. According to the Kaiser Commission on Medicaid and the Uninsured, in 2009, two of every five among the 40 million workers with annual income less than $20,000 had employer-sponsored coverage, in contrast to 86 percent of the 60.2 million workers with incomes of $40,000 or more. Thus, though employers’ responses to changes in this feature of the tax code would affect a greater number of higher-income workers, 16 million low-wage workers could be affected as well.
Limiting the ability to deduct home mortgage interest payments from taxable income could reduce the incentive to own a home, the major form of wealth among U.S. households. A recent study by the Pew Research Center found that in 2009, among white households, home equity constituted 38 percent of net worth (defined as assets minus liabilities/debts). Home equity accounted for greater shares of wealth among African American households (56 percent) and Latino households (55 percent), even after accounting for losses due to the Great Recession. Thus, reducing the incentive to own a home could disproportionately reduce the wealth of African Americans and Latinos.
Like the path to deficit buildup, the path to deficit reduction will be long and winding. As we embark on this path, we should be alert to the possible consequences of all proposals for persons at lower income levels.