obama_jobs_t210.pngLast week the Human Resources Legislation Blog described parts of President Obama’s “American Jobs Act” proposal, including payroll tax holidays for workers and employers to boost employment and consumer spending.

It was pointed out that one of the biggest questions about the legislation is whether Congress will approve it—and that a key factor in answering that question is how the President proposes to pay for its $447 billion cost.

New government spending and tax cuts are sensitive subjects in Washington DC these days, particularly after this summer’s bruising battle over raising the public debt ceiling above the previous $14 trillion limit. A special Congressional “Super-Committee” has already begun the hard work of identifying $1.5 trillion in new spending cuts as part of a longer term budget deficit reduction program. Read more.

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The President’s Jobs Bill: How to pay for it?

Fri Sep 16, 2011

obama_jobs_t210.pngLast week the Human Resources Legislation Blog described parts of President Obama’s “American Jobs Act” proposal, including payroll tax holidays for workers and employers to boost employment and consumer spending.

It was pointed out that one of the biggest questions about the legislation is whether Congress will approve it—and that a key factor in answering that question is how the President proposes to pay for its $447 billion cost.

New government spending and tax cuts are sensitive subjects in Washington DC these days, particularly after this summer’s bruising battle over raising the public debt ceiling above the previous $14 trillion limit. A special Congressional “Super-Committee” has already begun the hard work of identifying $1.5 trillion in new spending cuts as part of a longer term budget deficit reduction program.

Reflecting that sensitivity President Obama pledged, in announcing his new jobs bill, that its cost would be fully paid for and that it would not add to projected budget deficits.

This week the President made good on that pledge, announcing his plan for funding the jobs bill: of its $447 billion price tag, $400 billion would be paid for by capping itemized deductions for high income earners, i.e., families with adjusted gross incomes in excess of $250,000 annually and individuals with adjusted gross incomes of more than $200,000.

More specifically, the proposal would limit, effective January 1, 2013, the tax value of all itemized deductions for high-income households to 28%, regardless of their actual income tax bracket. For example, an individual in the 33% tax bracket contributing $10,000 to charity could realize a maximum tax benefit of $2,800, not $3,300. So too, an individual in the 35% bracket with $25,000 annually in tax deductible mortgage interest payments and state and local property taxes could have a maximum tax benefit of $7,000, not $8,750.

Incidentally, the 28% cap appears to apply to exclusions as well as deductions, thereby also limiting the tax exclusion for employer-provided health coverage. An individual in the 33% tax bracket whose health plan is valued at $15,000 would save only $4,200 in taxes, not $4,950—put another way, the individual would pay $750 more in taxes.

What are the chances that Congress will endorse the President’s proposal to cap itemized deductions for wealthy households? To be sure, in this era of partisan gridlock on Capitol Hill, bipartisan agreement on anything is rare. Nevertheless, if history is any guide there is bipartisan agreement on the idea of capping itemized tax deductions—Democrats and Republicans alike are against it! Indeed, when Democrats controlled both the House and the Senate in 2009 they did not approve a similar plan to help finance healthcare reform. Why?

First, there is general aversion to raising taxes, any taxes, when unemployment is above 9% and 14 million people are out of work. For many lawmakers the risk of tipping the economy into a double-dip recession is too great to raise taxes right now.

Second, with house foreclosures still high and prices still falling in many regions, any proposal that could conceivably be adverse to the housing sector has no chance of being approved by Congress. This proposal would cap mortgage interest tax deductions and therefore limit one of the big advantages of home ownership.

Third, charitable giving was severely impacted by the 2008 recession and has yet to fully recover. Nonprofit organizations like those that support cancer and AIDS research, disaster relief and disabled veterans, as well as universities and churches, are likely to oppose legislation that would reduce the value of tax deductions for charitable contributions.

While few things in Washington DC can be predicted with any degree of confidence this can be—Congress will not approve the President’s “pay for” to offset $400 billion of his $447 billion jobs plan.

That said, the Congressional outlook for the President’s plan becomes increasingly murky. In essence, if the cap on itemized deductions is rejected, the buck is then passed to the Super-Committee charged with coming up with $1.5 trillion in cuts in the federal budget deficit. Suddenly their task is to find another $447 billion in deficit offsets.

Starting this week Congressional committees will begin to dissect President Obama’s proposed American Jobs Act. It remains unclear whether they will approve all, some or none of its key provisions. The payroll tax holiday for employers and workers has perhaps the best chance of being enacted into law.

But the “pay-for” question remains as important—and as unresolved—this week as it was last week. Answering that question is the prerequisite for Congressional approval of the President’s plan.