WASHINGTON — An independent watchdog group has proposed $2 trillion in deficit reductions, including slashing the deduction of state and local general sales taxes to save more than $23 billion over 10 years.
In a 35-page report published Monday, Taxpayers for Common Sense identified more than 100 specific cuts that could serve as an alternative to the looming automatic budget cuts known as “sequestration.”
The group noted that both Congress and President Obama were responsible for failed budget and debt ceiling negotiations and as a result the federal budget faces across-the-board spending cuts scheduled to go into effect on Jan. 2.
“And that’s who is going to have to be responsible for defusing the ticking budget time bomb that would cut $1.2 trillion indiscriminately,” the group said.
Under sequestration $109.3 billion would be cut equally from defense and nondefense spending in 2013. Some 7.6%, or $255 million, in federal subsidies for Build America Bonds could be cut in the first year. Total cuts for all direct-pay bonds, could be $322 million.
Taxpayers for Common Sense said the expenditures it is targeting “can be safely eliminated from the budget because they are an inefficient, ineffective, or wasteful use of taxpayer dollars.”
“Instead of being fiscal cliff jumpers, Congress can dive into the hard work of cutting spending, finding revenue, and reforming entitlements to turn the country’s fiscal situation around,” the group said.
Taxpayers for Common Sense proposed eliminating $946 billion in tax expenditures over 10 years, including the mortgage interest deduction ($645 billion) and the deduction of state and local general sales taxes. The group said that the state and local tax deduction only has major beneficiaries in states that don’t have income tax such as Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Eliminating the deduction would save $2.34 billion in the first year alone.
Taxpayers for Common Sense also proposed cutting $5.3 billion in infrastructure investment and $187.5 billion in transportation spending over 10 years. One of the largest cuts would be $109.6 billion over 10 years from the Highway Trust Fund.
Meanwhile, the Tax Policy Center, the Urban Institute and the Brookings Institute released a separate report Monday that warned U.S. households face an average tax increase of almost $3,500 or 5% of pretax income in 2013 if Congress doesn’t act and avoid the “fiscal cliff.”
The report titled “Toppling Off the Fiscal Cliff: Whose Taxes Will Rise and How Much?” concluded that nearly 90% of Americans face higher taxes in 2013 if Congress doesn’t avert the fiscal cliff, when a mix of federal spending cuts and tax hikes are scheduled to go into effect that could toss the economy back into a deep recession.
Collectively, taxes will increase by $536 billion or about 21% in 2013 relative to the taxes people would owe if all pending tax increases were postponed, the report said. Every income group would see taxes rise by more than 3.5% of pretax income.
“This is a very large tax increase,” Donald Marron, director of the TPC, told reporters.
Upper-income taxpayers would experience the largest tax increases. On average their overall federal tax rate would rise from 31.2% to 38.4%, the report said.
The Tax Policy Center analyzed nine categories of taxes and ranked them based on their likelihood that they will take effect. They concluded that the payroll tax holiday will almost certainly expire because neither presidential candidate has proposed extending the temporary payroll tax cut and Congress has shown little appetite for more economic stimulus.
However, the analysts said that it was unlikely lawmakers wouldn’t “patch” the alternative minimum tax and save nearly 20 million people from being hit in April. If Congress did not “patch” the AMT it would affect 14% of tax units overall and 48% of taxpayers in the top quintile.
The AMT is a federal income tax that’s calculated separately from the regular federal income tax and is designed to prevent the wealthy from taking so many tax deductions and exclusions that they avoid paying taxes. One of the exclusions is tax-exempt interest from munis.