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Tax reform a tough sell

The panel's call for cutting deductions likely won't fly

Treasury Secretary John Snow presents the report on federal tax reform Tuesday. At left is panel member Edward Lazear.
Treasury Secretary John Snow presents the report on federal tax reform Tuesday. At left is panel member Edward Lazear.
Susan Walsh, Associated Press

WASHINGTON — President Bush's tax panel recommended Tuesday that Congress dramatically simplify the U.S. tax code, but the plan's attack on popular deductions left its fate in question.

Treasury Secretary John Snow thanked the President's Advisory Panel on Federal Tax Reform for its "bold recommendations," but did not commit the White House to supporting any of the ideas contained in the 272-page report.

After a careful review, Treasury will use the report "as a starting point for recommendations that we will make to the president," Snow said.

Many lawmakers and lobbyists essentially declared the panel's work doomed because of its call for cutting beloved deductions, such as those for mortgage interest and state and local taxes.

"This proposal is out of touch with hard-working American families and should be entitled the 'Anti-American Dream Act,' " said Rep. Robert Wexler, D-Fla., who joined a Capitol Hill news conference with representatives of the National Association of Mortgage Brokers, the National Association of Home Builders, the National Association of Realtors and the Mortgage Bankers Association.

The bipartisan tax panel's nine members, appointed by Bush in January, told Snow in a letter that they had expected to stir up a hornets' nest.

"The effort to reform the tax code is noble in its purpose, but it requires political will power," the letter said. "Many stand waiting to defend their breaks, deductions and loopholes, and to defeat our efforts."

The panel urged Congress to consider any tax reform plan as a whole, and keep sight of the primary goal: raising the same amount of revenues while drastically reducing paperwork for filers.

The panel was determined to eliminate the alternative minimum tax, created decades ago to ensure that the wealthiest Americans would pay at least some taxes. Because it was not indexed to inflation, the tax increasingly has been hitting middle-class families far from the top tiers of wealth.

Finding a way to offset the $1.2 trillion the alternative minimum tax is expected to raise over 10 years was a challenge. The panel's solution was to reduce federal deductions and credits for interest on very large mortgage payments, state and local taxes and education.

At its final public meeting in October, the panel made it clear that after considering a range of options, such as a national retail sales tax or a flat tax, it would not endorse radical change. Instead, it would focus on fixing the progressive income tax system.

In its final report, the panel urged Congress to reduce the number of tax brackets from the six to no more than four, with a lower top rate.

It urged converting the traditional home mortgage interest deduction into a credit equal to 15 percent of mortgage interest paid. The $1 million cap on mortgages eligible for the tax break would be reduced to the average regional price of housing, ranging from $227,000 to $412,000.

The panel also wants Congress to allow taxpayers to buy medical insurance using untaxed dollars, up to about $5,000 for an individual and $11,500 for a family. That would cap the now unlimited tax breaks some people enjoy, while creating a new tax break for those who get no insurance at work.

The panel said it could recommend Congress tax all investment income at a flat 15 percent. But it also offered an alternative approach: having individuals pay no tax on dividends paid by U.S.-based corporations, while excluding 75 percent of their capital gains from taxation.

The panel also recommended replacing dozens of deductions with three simple savings plans intended to encourage taxpayers to prepare for retirement, medical expenses and family expenses such as education.

The panel said that if its recommendations were followed, every taxpayer would find it far simpler to file an annual return. It issued a sample tax form the size of a large postcard that would replace the current Form 1040.

The House Ways and Means and Senate Finance Committees, which write tax laws, have promised to examine the recommendations.

But it's far from clear whether Congress would be in any mood to pass them.

Both Democrats and Republicans took shots at the recommendations. For example, Rep. John Linder, R-Ga., a leading supporter of a national sales tax, issued a statement saying he was "disappointed," and still hoping Bush would back "a personal consumption tax on the purchase of new goods and services."

Rep. Lloyd Doggett, D-Texas, a Ways and Means committee member, also slammed the panel's work, saying it "failed to eliminate the multiple complexities and special-interest provisions ... and it wholly dodged the growing problem of corporate tax dodging."

Lobbying groups jumped out quickly to criticize the panel's work. National Association of Manufacturers President John Engler said in a statement that "the suggestion that we limit the tax exclusion for employer-provided health benefits is quite troubling."

Asked whether Bush would support his panel's recommendations, White House spokesman Scott McClellan said he was "not going to speculate about what the president may or may not do."

Former Sen. Connie Mack, R-Fla., chaired the panel, while former Sen. John Breaux, D-La., served as vice chairman.