Dramatic tax changes?

Federal plan would limit or zap most deductions

By Marilyn Geewax
Cox News Service

WASHINGTON A presidential panel on Tuesday proposed a dramatic reshaping of the nation's income tax system that would limit or eliminate almost all existing tax deductions including those for state and local income and property taxes but greatly simplify filing.

The plan faces an uphill battle to become law, even though it addresses the highly unpopular complexity of the current system. It was immediately criticized by both Democrats and conservative Republicans, and would have to withstand fierce lobbying by interests that stand to lose lucrative tax breaks.

The panel, all of whose members were appointed by President Bush, wants lawmakers to eliminate federal deductions for state and local taxes and convert the popular mortgage deduction to a tax credit worth 15 percent of the interest paid on the average federally backed mortgage no more than $312,000 at present. Taxpayers who live in areas with expensive houses and high taxes would be hit hard.

But the panel also wants to create new tax credits and abolish the unpopular alternative minimum tax, which is hitting a growing number of middle-class households. In the end, the great majority of Americans would get fewer deductions, but pay no more in taxes, panel members said.

"The bottom line: taxpayers will pay about the same," said Charles Rossotti, a panel member and former Internal Revenue Service commissioner.

The White House made no commitment to stick to the panel's recommendation when forwarding its tax-simplification proposal to Congress, a move that White House spokesman Scott McClellan said is not expected before next year.

At its final meeting before reporting to Bush on Nov. 1, the panel endorsed two approaches for simplifying taxes.
Its preferred plan calls for keeping the current system, while reducing the number of deductions.

A more sweeping alternative would set four tax rates on wages for individuals 15, 25, 30 and 35 percent and tax most investment income at 15 percent.

Rossotti, saying the panel's preferred plan would do much to simplify taxes, said, "I don't think it's a small move in this direction; I think it's a huge move."

On an overhead screen, he displayed a new version of the IRS Form 1040 filed by individuals: a single page that would allow average Americans to determine how much they owe with little trouble. It reduces the number of lines to 32, down from 75 on the current form. The number of worksheets, schedules and other attachments would be slashed to about 10 from five times that.

Most people would be able to "pay on one page at one rate," Rossotti said.

The panel also recommended creation of savings accounts for retirement and major family expenses. Bush already has endorsed that idea.

The plan would cap deductions for employer-provided health insurance, establishing a tax-free limit at $11,500 for families and $5,000 for individuals the same amounts provided to members of Congress. Other fringe benefits provided to certain employees, such as child care and life insurance, would be taxed as compensation.

The panel would keep the earned income tax credit, which was designed to help low-wage workers. But it would give them the option of checking off a box to let the IRS make the complex calculation. Low-wage taxpayers could would be eligible for a new savers credit of up to $500.

The nine-member panel said it would continue to "refine" its recommendations before Nov. 1. The recommendations will go to the Treasury Department to be reviewed and shaped into legislation.

Henry Aaron, a tax policy expert at the Brookings Institution, said he doubts the panel's vision could become reality because "a revenue-neutral proposal has an uphill struggle."

That's because many lobbyists will fight ferociously to protect existing deductions, while few will push as vigorously for benefits that don't yet exist. "It is a political law of life that those who think they are going to lose fight like steers," he said. "Losses count more than gains" among lobbyists, he said.

For example, the proposal will run into fierce opposition from companies involved in the housing market. Current law allows taxpayers to deduct interest on home mortgages up to $1 million, which tends to encourage Americans to move into ever bigger homes.

The difficulties ahead were also outlined by the criticism leveled at the plan from across the political spectrum.
Conservatives who have been pushing to replace the income tax with a national sales tax or a one-rate "flat tax" dismissed the proposal.

Thomas Wright, a sales-tax supporter and executive director of Americans for Fair Taxation, led dozens of demonstrators who waved signs outside of the panel's meeting at the Ronald Reagan International Trade Building, just blocks from the White House.

"The tax panel will only tinker with the system and repeat the errors of the past," Wright said. "True reform has been taken off the table."

A spokeswoman said Rep. John Linder, R-Ga., a leading proponent of a national sales tax, had no comment on the plan.

Congress members representing high-tax states with expensive houses also voiced their opposition.

Sen. Charles Schumer, D-N.Y., said in a statement, "It is hard to conceive of something that could hurt New York more than the elimination of state and local tax deductibility," he said. "It would impose a new $12 billion tax on the people of New York."

Sen. Charles Grassley, R-Iowa, chairman of the tax-writing Senate Finance Committee, noted the steep road ahead for the plan. "Some of the things they're recommending were hot issues in the 1990s, and they were dropped after being pushed by predecessors of mine very strongly and just didn't get anywhere," he said.

Former Sen. Connie Mack, R-Fla., heads the panel, while former Sen. John Breaux, D-La., serves as vice chairman.
Mack and Rossotti argue that elimination of the alternative minimum tax would make the loss of other deductions a wash.

The AMT was designed in the late 1960s to keep the very wealthiest taxpayers from using deductions and loopholes to escape paying all taxes. But it was not adjusted for inflation, so that increasingly, it ensnares middle-class families who are far from the top tiers of wealth.

Eliminating the AMT would wipe out $1.2 trillion in tax revenues over the coming decade a change that would drastically worsen the budget deficit if Congress did not take away other deductions.

Congress has not taken a stab at tax reform since 1986 when President Reagan pushed lawmakers to lower income tax rates while wiping out more than $500 billion in tax shelters and deductions.