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Commission Recommends Overhaul of Federal Income Tax

So, much to the dismay of organized interests including Realtors and governors, the nine-member panel decided to cancel or trim some of the tax code's most widely used itemized deductions to offset the additional goodies it wants to hand out.

The panel urged that the mortgage-interest deduction be reduced for the highest-income taxpayers. Currently, interest paid on mortgages of up to $1.1 million can be written off. Under the plan, only the first $227,000 of a mortgage in inexpensive housing markets could be used to reduce taxes. In pricier places, the cap would be set at $412,000. The panel would also convert the mortgage-interest deduction to a 15 percent credit, which could aid middle-income homeowners.

On health coverage, the commission proposed to limit the amount of insurance an employer can provide tax-free to employees to $5,000 for an individual and $11,500 for a family. The panel's change would discourage extensive health plans, especially for upper-income individuals. Currently, the benefit has no limit.

In addition, the panel would terminate the deduction for state and local tax payments, a provision that would fall hardest on high-tax regions, such as New York and California. The last time Congress significantly revised the income tax, in 1986, lawmakers had to back off a proposal to cut the state and local tax deduction because of complaints from local politicians.

Former senators Mack and John Breaux (D-La.), who headed the panel, defended the cutbacks as necessary to raise revenue to pay for such worthy changes as the repeal of the AMT. They also said that, taken as a whole, the package wouldn't much change the distribution of the tax burden among individuals in different income categories.

Still, the National Association of Realtors said "the value of the nation's residential property could decline 15 percent or more" if the panel's mortgage proposals become law. Gerald M. Howard, chief executive of the National Association of Home Builders, criticized the measures as "the biggest tax hike for homeowners ever considered."

Life insurance companies and agents were also upset, fearing that the savings proposals could supplant or compete with their products. A coalition of life insurance associations called the plans "a retreat from America's historic commitment to helping Americans achieve financial and retirement security." The American Society of Pension Professionals & Actuaries said the plans would be "devastating to the retirement security of millions of American workers."

Democrats on Capitol Hill were blistering. Rep. Charles B. Rangel (D-N.Y.), a senior member of the House Ways and Means Committee, called it "unwise and unfair." Even the Republican chairman of the Senate Finance Committee, Charles E. Grassley of Iowa, acknowledged that parts of the report "are bound to be politically unpopular." But it will provide "a comprehensive starting point that will get everyone talking and thinking," Grassley said.

On the business and investment side, the first, "simplified," plan would cut nearly in half the top tax rate on capital gains (the profit from the sale of property and securities) and allow individuals to collect stock dividends tax-free. It would also set the tax rate for large businesses at 31.5 percent, down from 35 percent.

The second, "growth," proposal would abolish deductions for interest paid except for financial institutions and allow companies to write off in a single year purchases of plant and equipment that they now must depreciate over time. Income from investments would face a levy of 15 percent. The rate on large business would be 30 percent.

Both plans would assess companies only on their domestic profits, ending the United States' long-held policy of taxing income wherever it originates.

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