A presidential commission recommended changes in the federal income tax system that would lower rates, reduce paperwork and eliminate or scale back most tax breaks, including popular deductions for home mortgage interest and employer-provided health insurance.
Lawmakers and interest groups attacked several of components of the plan, which was presented yesterday to Treasury Secretary John W. Snow. But Snow said he hoped to refine the suggestions for President Bush by year-end and expressed optimism that Congress would enact a version of them.
"We will take the ball," Snow said. "It's our turn to run with it."
Tax experts and other analysts think the president, whose approval ratings have dropped significantly, might want to champion a new domestic initiative now that his effort to add private accounts to Social Security has stalled. As a result, they give a plan that purports to make the tax code simpler and fairer a decent chance despite its many vocal opponents.
Bush established the bipartisan panel in January and asked it to find ways to simplify the U.S. tax system in a way that would also promote "long-term economic growth and job creation." Snow quoted the president as saying earlier this year, "I really want bold, far-reaching recommendations."
The President's Advisory Panel on Federal Tax Reform worked for 10 months before unanimously backing two plans that differ primarily in how businesses would be treated. They both would streamline the tax system in many places, but they would also complicate tax benefits for wealthy individuals.
Both plans would decrease the number of tax brackets, bolster incentives for saving and investment and repeal the provision considered the current system's costliest weakness: the alternative minimum tax. The AMT was designed to force millionaires who took extensive advantage of loopholes and tax shelters to pay at least some taxes, but it now threatens to increase taxes on moderate-income families.
The first proposal, labeled a "simplified income tax plan," would reduce the number of tax rates for individuals to four from six and set the top rate at 33 percent, down from 35 percent. The second proposal, called a "growth and investment tax plan," would slice the number of individual tax brackets to three and set the top rate at 30 percent.
Both plans would consolidate the personal exemption, the standard deduction and the child care credit into a single "family credit." The earned income tax credit and related subsidies for low-income workers would be collapsed into a "work credit."
The long list of tax breaks now available that promote saving -- for education and individual retirement accounts, among others -- would also be simplified into three tax-free accounts: "Save at Work," "Save for Retirement" and "Save for Family." Low-income families would receive an additional "savers credit."
Such consolidations would drastically shorten the forms taxpayers use to file their income tax returns. Panel Chairman Connie Mack, a former Republican senator from Florida, claimed that millions of taxpayers would be able to convert their multi-page filings into a single, four-by-six-inch card printed on both sides. The model form he was waving in front of cameras, however, was 51/2 inches by 81/2 inches.
The extra benefits suggested by the panel, especially the rate reductions, would deprive the Treasury of billions of dollars a year. Ending the AMT alone would cost $1.3 trillion over 10 years. But the panel pledged that its plans would neither raise nor lower the federal budget deficit, which has lately exceeded $300 billion a year.
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.