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.
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 find themselves paying 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 on a deal.
Republicans are becoming increasingly divided over the issue of raising taxes. A growing number of Republicans in Congress say they would support a tax reform package that increases revenues, if it is coupled with significant spending cuts, enough to reduce the deficit by about $4 trillion over the next decade.
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 any tax increases.
"We must recognize that increasing the tax burden on American businesses and citizens, especially during a fragile recovery, is irresponsible and dangerous to the health of the United States," said the letter, circulated by Rep. Patrick McHenry, R-N.C.
Democrats, meanwhile, have panned Toomey's plan, saying the rate reductions would cut taxes for the wealthy so much that taxes on the middle class would have to be raised. They also argue that Toomey's plan would generate less revenue than advertised.
They note that Toomey's plan assumes that tax cuts enacted under former President George W. Bush, and extended through 2012 under President Barack Obama, would continue. Toomey's plan would then cut the tax rates even more.
Republicans say Toomey's tax overhaul plan would increase tax revenue by $250 billion over the next decade. An additional $40 billion would be raised by using a new measure of inflation to adjust the tax brackets each year. Annual adjustments to the tax brackets would be smaller, resulting in more people jumping into higher tax brackets as their incomes rise.
The supercommittee has a Wednesday deadline to come up with a plan to reduce government borrowing by at least $1.2 trillion over the next decade. If the panel fails, $1.2 trillion in automatic spending cuts to domestic and military programs would take effect in 2013.
Some details of Toomey's plan remain in flux, in part because he is open to changes to help forge an agreement, said the GOP aide, who spoke on condition of anonymity to discuss private negotiations. The aide confirmed that Toomey's plan is closely modeled after a proposal by three experts at the National Bureau of Economic Research, a private research organization perhaps best known for deciding when recessions begin and end.
The three experts are Martin Feldstein, a Harvard University professor who was President Ronald Regan's chief economic adviser; Maya MacGuineas, president of the Committee for a Responsible Federal Budget; and Daniel Feenberg, a research associate at the bureau.
Under their plan, the tax benefits from itemizing deductions and excluding employer-provided health insurance from taxable income would be limited to 2 percent of taxpayer's adjusted gross income.
That means if a taxpayer has an adjusted gross income of $50,000, deductions and exemptions could reduce his or her tax bill by a maximum of $1,000.
Taxpayers who face limits on their tax breaks could opt to take the standard deduction instead. Currently, about one-third of tax filers itemize their deductions. The rest claim the standard deduction, which in 2011 is $5,800 for individuals and $11,600 for married couples filing jointly.
The plan envisions millions of additional taxpayers switching to the standard deduction, which would simplify their returns, MacGuineas said.
Policymakers across the political spectrum agree the federal tax code is too complicated, and most agree on a basic formula for simplifying it: Reduce tax breaks and use the additional revenue to lower the overall tax rates for everyone.
There is little agreement, however, on which tax breaks to target.
Toomey's plan attempts to sidestep debates over which tax breaks to target and instead proposes to limit taxpayers' overall ability to reduce their tax bills."This is a far more practical way to start to scale back the influence and costs of tax expenditures in the code by kind of glopping them together and capping them," MacGuineas said. "You're not picking the winners and losers."