Republicans offer a tax proposal on the deficit

Reporting from Washington —  Republicans floated a new deficit reduction proposal to the congressional “super committee” that breaks from their no-new-taxes stance, but the offer was dismissed Tuesday by Democrats because it would lock in lower income tax rates for the wealthiest American households.

The $1.2-trillion offer from the GOP comes as Republicans are under pressure to show that their anti-tax commitment will not doom the panel’s efforts. The committee is deadlocked as it tries to agree on a proposal by its Thanksgiving deadline to cut federal deficits over the next decade.

Democrats have offered a nearly $3-trillion package that would cut Medicare and other entitlement programs, but only if Republicans agree to add new taxes to the mix.

Sen. John F. Kerry (D-Mass.) said the GOP proposal showed a “slight” but “not substantial” change in position.

It “doesn’t get the job done, and we’ve got some distance to travel,” said Kerry, one of 12 members of the committee that includes six lawmakers from each party.

Republicans familiar with the proposal said it was offered by one GOP member on the panel.

Both sides retreated behind closed doors Tuesday as talks continued. Failure to strike a deal could raise the prospect of another downgrade to the U.S. credit rating and jolt the financial markets during the holiday shopping season.

The Republican proposal is the first time the GOP has openly considered using tax revenue for some amount of deficit reduction, putting them at odds with fiscal conservative Grover Norquist, who has secured anti-tax pledges from many lawmakers and dismissed the new proposal in a tweet as an “idiot idea.”

The GOP plan would essentially swap lower tax rates — ending the long-running debate over the expiring President George W. Bush-era tax breaks — for new limits on itemized tax deductions used primarily by wealthier households, such as the mortgage interest deduction on second homes.

Republicans estimate that closing or limiting such itemized deductions would generate $250 billion in new tax revenue over 10 years, some of which would be applied to the deficit, with the rest used to lower income tax rates across all brackets.

The top income tax rate under the GOP proposal would drop permanently to 28% from the current 35% enacted under Bush. If the break is allowed to expire at the end of 2012, as it is scheduled to do, the top rate rises to 39%.

Republicans believe the lower tax rate would generate economic growth that would lead to additional tax revenue.

Democrats dismissed the proposal as unrealistic, saying the cost of the income tax breaks would substantially exceed the revenue generated by eliminating or reducing some itemized deductions.

For example, eliminating the mortgage deduction for second homes would generate about $15 billion, while every 1 percentage point reduction in the income tax rate costs about $100 billion over 10 years, budget experts said.

“Their plan would mean a massive tax cut for big corporations and the wealthiest Americans and is not a solution Democrats or middle-class Americans would ever be willing to accept,” said a Democratic aide familiar with the talks who was not authorized to discuss them publicly and who spoke on the condition of anonymity. “It’s a shell game.”

President Obama has proposed raising top tax rates to their pre-Bush levels and congressional Democrats on the super committee proposed more than $1 trillion in new taxes, mainly on upper-income households. Republicans have dismissed that level of tax revenue as a nonstarter.

The new GOP proposal also includes up to $300 billion in other non-tax revenue, primarily from government assets and lease sales, as well as $700 billion in cuts to Medicare and other government programs.

Failure by the super committee to emerge with a proposal would trigger mandatory spending cuts to defense and domestic accounts that both sides hope to avoid.

But because those cuts do not take effect until January 2013, many in Congress doubt they will come to pass, especially as defense hawks are working to prevent Pentagon cuts they say would harm the military.

lisa.mascaro@latimes.com