THERE ARE MANY reasons to pity the President's Advisory Panel on Federal Tax Reform. It keeps getting upstaged by other events -- most recently Hurricane Katrina, which prompted the panel to put off releasing its already-delayed report on revamping the federal tax system. The chances that its work will actually result in fundamental reform are slim, given the fate of President Bush's last big idea, overhauling the Social Security system, his political difficulties and the myriad interests (and their lobbyists) that come into play when the tax code is at stake.
Increasing the challenge are the tight constraints in which the tax panel must maneuver. Under the presidential order that created it, whatever plan the panel comes up with must be "revenue neutral" -- there's no extra tax bounty to spread around to ease whatever political pain might be caused by changes elsewhere. Even more limiting, that assumption of no overall change in tax revenue presumes that Mr. Bush's tax cuts will be made permanent. That means the tax reformers are slicing an even smaller pie than if the cuts were permitted to expire as scheduled.
But here's the good news: Within those confines, the reform panel is heading toward politically explosive but sensible suggestions. One involves what might be thought of as the third rail of the tax code: the home mortgage deduction. Under current law, taxpayers can only deduct interest paid on the first $1 million of borrowing. The commission is leaning toward making the mortgage deduction less valuable for the wealthiest taxpayers.
That could take a number of forms: lowering the size of the mortgage on which payments could be deducted from taxes, perhaps to around $300,000; limiting the deduction to 15 or 25 percent of the mortgage payment, rather than the 35 percent that those in the highest tax brackets can now deduct; or transforming the deduction into a credit regardless of income. This makes sense. You can promote homeownership without promoting mansion ownership as well.
A second, almost as politically volatile proposal would limit deductions for health insurance. Currently, employers can deduct the cost of providing health insurance to their employees, and employees aren't taxed on the value of the benefits they receive. The panel is weighing whether to tax benefits in excess of a certain amount -- perhaps $11,000 annually, the value of federal employee health benefits.
This, too, would be a good move that could have the benefit of helping put a brake on the increase in health care costs by making people more cost-conscious. With many employers already bailing out of providing insurance, it would need to be done carefully, with attention in particular to the effect on smaller firms, where even a few particularly sick employees can drive up premiums.
The tax code is a complex machine with many moving parts; it's impossible to assess where the commission is heading until the entire package is unveiled next month. But these two approaches reflect some nimble moves by the panel's tax contortionists.