Inside Job

The National Commission on Fiscal Responsibility and Reform

The National Commission on Fiscal Responsibility and Reform

You've undoubtedly heard about the draft recommendations to reduce the federal deficit that were issued by The National Commission on Fiscal Responsibility and Reform. The Commission has a December 1 deadline for submitting a final plan. National Commission Co-chairman Alan K. Simpson and Erskine B. Bowles released the report early so that "the American people [can] start to chew on it." Some critics are already starting to gag on the proposed plan.

The proposed cuts include, among others: reducing Social Security benefits to future retirees and increasing the income base for future tax withholding; cuts in payments to doctors and hospitals for treating the poor; a gradual 15-cents-a-gallon increase in the federal gasoline tax; and repeal or modification of the deductibility of mortgage interest payments. In the latter case, the change in deductibility of mortgage interest would trigger a reduction in income tax rates that still is estimated to bring in additional revenue to the Treasury in the amount of $80 billion in 2015.

The Commission has the unenviable job of making tough choices to reduce the federal deficit to stave off possible future bankruptcy of the country.  However, there are some changes that seem to defy logic. For example, the reduction of the mortgage interest tax deduction can only hurt an already devastated real estate industry. One reason to buy a home is the mortgage interest deduction. If I make a $1,000 per month interest payment and I am in the 25% tax bracket, the mortgage payment effectively costs me $750. What if rents in my area average $850. Without the tax deduction I'm spending an extra $150 on housing ($1,000-$850). Why should I go through the hassle of owning a home and paying for upkeep and repairs especially in this down real estate market? But, isn't home ownership supposed to be part of the American dream? Is that dream dead?

I wonder about the increase in the federal gasoline tax. The original purpose of gasoline taxes was to maintain and improve highway transportation. Is the federal government going to return that money to the states for that purpose or will it fix our deteriorating federal highway infrastructure? And who is looking out for the interests of the poor? Will their medical care get worse because of the cuts in hospital payments? How does this square with the stated purpose of the Health Care Reform Act that is supposed to provide health care services for more citizens?

I also wonder about the make-up of the Commission. The only special interest group represented is SEIU, the services employees union. I didn't find any reductions in the tax deductibility of union dues. Even though the deductibility of these unreimbursed employee expenses is limited to the excess over 7.5% of adjusted gross income, the deductibility of the dues can include the lobbying expense portion under certain circumstances. Did the presence on the Commission of Andy Stern, the president of SEIU, affect the lack of any proposed change in the deductibility of union dues? I still don't understand why union dues are deductible (albeit above the 7.5% base) and the home mortgage interest deduction may be repealed. What industry is economically stimulated by allowing union dues deductions?

Why isn't there any representation of retiree groups on the Commission? Who spoke up for the real estate industry. We may not like what they did by selling homes to unqualified buyers that was instrumental in creating the subprime mess. Still, from an ethical perspective, all groups affected by the outcome of the decisions of how best to reduce the federal deficit should be represented in the deliberations.