A presidential advisory panel agreed to propose at least two broad changes to the federal income tax when it makes its final report to President Bush by Nov. 1, prompting protests from public officials and interest groups.
The first plan would simplify the current system by eliminating the deduction for state and local taxes, among other tax benefits. The second and more far-reaching proposal would move the tax code toward a modified tax on consumption.
The President's Advisory Panel on Federal Tax Reform has been meeting all year, often in public session as it did yesterday in Washington. Its task is to present the president with a menu of options for altering the federal income tax.
Bush has not committed to accepting or rejecting anything the panel offers. But if its preliminary judgments are any guide, the panel will have a hard time getting its decisions through Congress.
The suggestion that the state and local tax deduction might be tampered with rankled Sen. Charles E. Schumer (D-N.Y.). Given New York's relatively high taxes, the loss of the deduction would disproportionately hurt New Yorkers, compared with residents of states that have lower taxes.
"It is hard to conceive of something that could hurt New York more than the elimination of state and local tax deduction," he said in a statement. "It would impose a new $12 billion tax on the people of New York."
The last time the income tax was revised, in 1986, a proposal to pare the state and local tax deduction had to be removed from the legislation before it had any chance of succeeding in Congress.
California State Treasurer Phil Angelides complained not just about the panel's proposal to end the deduction but also about its decision, made earlier this month, to recommend new limits on the tax deduction for mortgage interest payments. Homeowners with large mortgages -- such as many in California -- would not be able to write off all of their mortgage interest payments under the panel's suggestion.
The National Association of Realtors also objected. "We believe that the mortgage interest deduction should not be touched," said spokesman Lucien Salvant. "It's important for home ownership, and home ownership is important to the economy, especially now."
One provision contained in both proposals approved by the tax panel yesterday would be more popular but would also be very expensive. The panel agreed that the alternative minimum tax (AMT) should be eliminated as part of either the simplified income tax or the progressive consumption tax.
The AMT was put into law as a way to force millionaires to pay at least some tax even if their tax liability was brought to zero by deductions, credits and exemptions. Over the years, the AMT has begun to hit upper-middle-income people, too. Terminating it would cost hundreds of billions of dollars over 10 years.
The proposals would reduce the number of tax brackets and the amount of paperwork people would have to file. The plans would also limit the currently unlimited tax breaks for health insurance premiums paid by employers to $11,500 per family.