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Treasury Secretary Timothy Geithner says it's up to congressional Republicans to take the next step in budget talks to avoid the pending automatic spending cuts and tax increases at the end of the year.
Appearing on the Sunday talk shows, Geithner said there's "no path to an agreement" until Republicans are willing to accept higher tax rates on the rich.
The GOP argues that if tax revenues must go up, it would be better to leave rates alone and instead limit deductions, or "loopholes."
Favoring A Cap
The idea of shrinking or eliminating tax deductions to raise money for the government is not new. Former presidential candidate Mitt Romney floated it, to offset the cost of his big tax cuts.
"One way of doing that would be to say everybody gets — I'll pick a number — $25,000 of deductions and credits," he said in the Oct. 16 presidential debate. "And you can decide which ones to use — your home mortgage interest deduction, charity, child tax credit and so forth. You can use those as part of filling that bucket, if you will, of deductions."
Romney may have lost the election, but the idea of limiting deductions lives on. Congressional Republicans have embraced it as a way to raise tax revenue without having to raise tax rates. Even some Democrats are willing to go along, if that's what it takes to win Republican support.
"We're in a political environment, and there's just a lot of different ways to skin this cat," says Jim Kessler, a senior vice president at the centrist think tank Third Way.
There's a lot of money to be made from this particular cat's skin. According to the Tax Policy Center, capping deductions at $50,000 per household would raise an extra $749 billion over a decade. That's about $300 billion more than the government would get from raising the top two income tax rates, as President Obama has proposed.
If the cap on deductions were set lower — say $25,000, as Romney suggested — the government would raise even more revenue: $1.2 trillion over a decade. Most of the extra tax would still be paid by the wealthy, but some would be collected from middle-income families.
Who Benefits From Deductions
Al Trevisan has one of those families that would be affected by a deductions cap. He's 43 and has been a firefighter for 20 years. His wife is a stay-at-home mom. Trevisan's income is well below the top tax brackets.
But last year, he and his wife had $41,000 in itemized deductions, largely because they live in the pricey housing market of Ventura, Calif., where even a modest home can carry a mid-six-figure mortgage.
"At least in Southern California, to make somewhere under $200,000 and have over $35,000 in tax deductions, it's pretty normal. ... All of our friends are pretty much in the same boat," he says.
Connecticut is another state where even middle-income families can have a lot of deductions. Greg Rutherford and his wife make about $150,000 a year, of which they deduct $35,000 to $40,000.
"Two large pieces of deductions are: our state income taxes, and then our local property taxes also [tend] to be pretty sizable," Rutherford says.
People in the pricey blue states along the coasts tend to have the biggest tax deductions. But limiting tax breaks could also hit some red state residents in the middle of the country. The highest average deductions for charity contributions are in Wyoming, Utah and South Dakota.
'An Obligation To Give Back'
Rutherford says he's not necessarily opposed to paying more in taxes. But he'd prefer to see an increase in the top tax rates as one way to address the country's big income gap.
"I was also a former military officer, and I honestly believe that just being born here gives you an opportunity that people in other parts of the world simply don't have," he says. "So if you happen to be successful, I think you have an obligation to give back to kind of improve the rest of society as well."
Trevisan also has mixed feelings about any effort to limit his tax deductions.
"As a firefighter, I understand that taxes need to be paid. That's where my salary comes from. That's how we fund new fire stations," he says. "But I also have to look at it [as] I'm just an average, middle-class guy trying to make a living for myself and my family, and it's tough."