Senate Budget Committee Chairwoman Patty Murray (D-WA) convened a hearing on March 5 entitled, “Reducing the Deficit by Eliminating Wasteful Spending in the Tax Code.” The hearing was about the need to scrutinize tax expenditures as closely as direct spending for ways to reduce the deficit. One of the largest tax expenditures is the mortgage interest deduction, which NLIHC proposes to modify in order to produce savings to fund the National Housing Trust Fund. According to the Office of Management and Budget, there were 173 tax expenditures in 2012 that cost the federal government over $1 trillion in uncollected taxes. Different tax expenditures reduce taxes for corporations and individuals and are often referred to as tax loopholes. In her opening statement, Chairwoman Murray said that, “for 70% of tax expenditures, the higher your income, the more you benefit. So the wealthiest households benefit the most, while middle class families receive much smaller benefits, and many of our most vulnerable don’t qualify at all. The less you need, the more you get.” Senator Murray cited Senator Tom Coburn (R-OK), Speaker of the House John Boehner (R-OH), and House Budget Committee Chairman Paul Ryan (R-WI) as Republicans who have criticized tax expenditures. She quoted Senator Coburn as saying tax expenditures “masquerading as tax cuts, many of these programs are no different from any other program that spends taxpayer money.” Representative Ryan was quoted as saying many tax expenditures are “mainly used by a relatively small group of mostly higher-income individuals.” While she favors lowering the deficit, Senator Murray also calls for using savings from reform of tax expenditures to make “crucial investments in our future, rather than lowering tax rates for those who are already doing just fine.” For his part, Ranking Member Jeff Sessions (R-AL) disagrees with the analysis that tax expenditures are federal spending by another name, and objects to the term “tax expenditures.” He said that allowing taxpayers to “keep money they earned due to deductions was not spending by the U.S. Treasury” and that “eliminating tax exemptions is a tax increase; you can’t spin it any other way.” All three of the witnesses disagreed with Senator Sessions and equate tax expenditures with spending. Russ Roberts of the Hoover Institution at Stanford believes all government spending should be cut, whether direct spending or through the tax code. He was especially critical of excessive government support for “rich financial executives, rich farmers, and rich old people who don’t need a government retirement program,” but also would leave serving the poor to the voluntary sector. Jared Bernstein, testifying on behalf of the Center on Budget and Policy Priorities, said that tax expenditures per se were not bad, but their utility should be evaluated by three criteria: revenue foregone, efficiency, and fairness. The benefit of most tax expenditures accrues to higher income people, “exacerbating the problem of high and growing income equality.” He uses the mortgage interest deduction as an example of how tax expenditures “disproportionately benefit the well off.” A tax expenditure that meets the criteria of fairness and efficiency is the Earned Income Tax Credit (ETIC). Edward Kleinbard, a law professor at the University of Southern California and a former Chief of Staff to the Congressional Joint Committee on Taxation, had the most to say about the mortgage interest deduction in his testimony. He said, “of all the current law’s tax expenditures, the most important to address in tax reform are the personal itemized deductions, such as deductions for home mortgage interest, charitable contributions, and state and local taxes. They are inefficient in that they lead to misallocations of economic resources, especially with regard to housing. They are poorly targeted, in that government subsidies go to individuals who would have behaved the same without the subsidies. And they are unfair, in that they are ‘upside down’ subsidies that subsidize high income Americans more than low income ones.” NLIHC proposes to lower the cap on the amount of mortgage for which interest can be deducted from $1 million to $500,000 and to convert the tax deduction to a 15% non-refundable tax credit. These changes would provide tax breaks to 16 million more homeowners with incomes of $100,000 or less who do not benefit from the mortgage interest deduction now. The proposal would also save $200 billion over ten years that NLIHC proposes be used to fund the National Housing Trust Fund. To read the witnesses’ written testimony and view the archived video of the March 5 hearing, go to http://1.usa.gov/Y3j147. Click here to learn more about NLIHC’s proposal to fund the NHTF and reform the MID. Click here to endorse the proposa.