Panel Urges Limits on Tax Breaks for Homes, Health Insurance

A presidential advisory panel agreed that changes in the federal income tax should limit popular tax breaks for both homeownership and employer-provided health insurance.

The decisions, made in a preliminary fashion yesterday by the President's Advisory Panel on Federal Tax Reform, are likely to to be opposed by the housing industry and other business interests.

The bipartisan panel was created in January by President Bush to examine large-scale alternatives to the tax code. It plans to make its final suggestions on Nov. 1. The president is not obliged to accept -- or to advance -- any of them.

Meeting in Washington, the nine-member panel agreed that it would be wise to reduce the total amount of mortgage debt for which interest is deductible. The limit now for a couple filing jointly is $1 million. A better cap might be $350,000, the panel said.

The panel also said that it might recommend limiting tax deductions for employer-provided health insurance. It discussed putting a cap of about $11,000 a year per employee on the amount of premiums that employers could deduct. Panel members said that these were concepts and that the specifics of the proposals are still being worked out.

Nobody knows how many, if any, of the proposals Bush will adopt. At the same time, the entire package would have little chance of success without his support. The panel is headed by former senators Connie Mack, a Florida Republican, and John Breaux, a Democrat from Louisiana. Both now work for lobbying law firms. The burden of a tax overhaul is to take revenue raised in one part of the code considered by some to be "unfair" in order to fund other changes in the code that would be considered "improvements."

For example, the panel recommended that tax breaks for charitable donations be expanded. It also rejected replacing the income tax with a sales tax or European-style value-added tax, both of which are considered to place more of a financial burden on lower-income people than on upper-income people.

In addition, some panel members complained that a value-added tax might be so easy to increase that it could instigate runaway federal spending. The panel might include as one of its recommendations that a value-added tax be used to supplement the income tax, however.

One part of the income tax that the panel hopes to reduce or eliminate is the alternative minimum tax. This provision, which was initially added to the code as a way to make sure that millionaires did not avoid paying taxes, is now beginning to hit upper-middle-income Americans as well.

Repeal of the alternative minimum tax would cost hundreds of billions of dollars over a number of years. The limits on the housing and health care provisions would help pay that cost, the panel said.