Tax plans would limit deductions

WASHINGTON – President Bush’s tax panel on Tuesday backed two similar plans to overhaul the nation’s income tax system that would eliminate or revise many current deductions and tax investment and business income more lightly.

The advisory group’s findings, to be reported to the Treasury Department at month’s end, will help shape the president’s proposal for tax reform that he is expected to outline next year.

The panel’s recommendations contain some politically explosive ideas, including putting limits on the popular mortgage interest deduction for homeowners and eliminating the deduction for state and local income taxes.

But it rejected proposals for a single “flat” tax and a nationwide sales tax or a version of it, such as a European-style value-added tax that had been endorsed by House Speaker Dennis Hastert. Instead, the panel proposed a thorough revision of the current income tax code so taxpayers would spend less time filling out forms. Under the proposals, the panel said Americans, as a whole, would pay roughly the same amount of tax as they do now, but individuals, depending on their circumstances, might pay more or less.

Bush hopes to make tax reform a key initiative in his second term, but the controversial and sweeping nature of the proposals would make it a daunting challenge for a lame-duck president already struggling with low approval ratings.

President Ronald Reagan signed a major tax-overhaul plan law in 1986, just two years before he left office while dealing with Iran-contra and other political controversies. But that reform came at a time when members of Congress tended to be more willing to reach bipartisan deals.

The two versions approved by the panel for consideration by the administration have many common elements, including abolishment of the alternative minimum tax, a levy originally designed to tax wealthy people but one which is now ensnaring millions of middle-class Americans.

Detailed plans were not yet available. Jeffrey Kupfer, executive director of the panel, said, “I would say the panel is well on its way to recommending a plan that is simpler, fairer and more conducive to economic growth.”

Both versions would reduce the number of tax rates from six to four, with the top rate at 33 percent in the plan aimed at simplifying the code and 35 percent in a second plan that would tax investment income, such as income stocks and bonds, much more lightly.

According to the panel, both plans call for three out of four taxpayers to be subject to the lowest tax rate of 15 percent.

In both versions, the home mortgage interest deduction would be replaced with a 15 percent credit for mortgage interest paid during the year. There would be a cap on the amount of mortgage eligible for the benefit. It would equal the Federal Housing Administration’s loan limitation, which varies by region.

This is perhaps the most controversial feature in the two plans. The panel sought to offset some of the controversy by raising the capital gains exclusion for home sales from $500,000 to $600,000 and then index the figure for annual increases in inflation.

Both proposals would rein in the unlimited tax breaks on employer-provided health insurance. These would be capped for insurance premiums at $11,500 for a family or $5,000 for an individual. All other untaxed employee fringe benefits would be taxed.

Sen. Charles Schumer, D-N.Y., sharply criticized the plan to do away with the deduction for state and local income taxes, especially since New Yorkers pay a high rate of tax and have large deductions. But the co-chairman of the panel, former Republican Sen. Connie Mack of Florida, defended the proposal as a way to raise funds so that the alternative minimum tax could be abolished.