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New Emphasis for Cat Food Commission?

We’re a little over a month away from the recommendations of the cat food commission, and while they are expected to fall mainly on the spending side, Damian Paletta sees the possibility of a number of tax expenditures falling by the wayside.

Sacrosanct tax breaks, including deductions on mortgage interest, remain on the table just weeks before the deficit commission issues recommendations on policies to pare back with the aim of balancing the budget by 2015.

The tax benefits are hugely popular with the public but they have drawn the panel’s focus, in part because the White House has said these and other breaks cost the government about $1 trillion a year.

At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.

The officials are also looking at potential cuts to defense spending and a freeze on domestic discretionary spending. It is unclear if the 18-member panel will be able to reach an agreement on any of the items by a Dec. 1 deadline.

There are politicians on the panel, right? Current politicians, who have to face voters again in their lives? Then count me out of expecting that the mortgage-interest deduction will be on the chopping block.

For the record, there’s no reason why second homes should get a mortgage-interest deduction, and a credible case to be made to cap the deduction for primary residences. But there’s no question that the usual suspects would characterize that as a tax increase. Same with the other tax expenditures mentioned there, and defense spending cuts would also come in for some criticism from the same sources.

We’re in the middle of a foreclosure crisis, where banks are seizing homes without proper documentation, and the watchword from the establishment is that we cannot stop this because it would crush the housing market. Under that logic, how would removing the greatest tax benefit for home ownership not do exactly the same thing?

Interestingly, Paletta claims that the commission will “steer clear” of tax reform, Medicare, Medicaid and Social Security in their short-term recommendations, which is a total reversal of expectations from most circles. Paletta claims that the talks have shifted away from this in recent weeks. But this is the most interesting part, and now that I think of it the most likely:

Committee officials plan to try to broker a deal in November, after the midterm elections. They have until Dec. 1 to win the support of 14 of the commission’s 18 members to endorse a final report. It is possible that the panel’s Democrats and Republicans would issue separate reports if they can’t agree, people familiar with the process said.

What would be the obligations of Congress in terms of a vote, under that scenario? Would they vote on each plan separately? Would they move into the committee process with the separate plans?

Amusingly, the panel is not expected to mention the biggest driver of the deficit in recent years and (along with Medicare and Medicaid) in the future, the Bush tax cuts. That shows how unserious a deficit commission it really is. But apparently, the efforts in progressive circles have at least temporarily beaten back the drive to cut retirement benefits.

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David Dayen

David Dayen