By David Hansen, Stephen Cooper and Paula Cruickshank, CCH Washington Staff Writers
The President's Advisory Panel on Federal Tax Reform on November 1, 2005, issued its final recommendations to Secretary of the Treasury John Snow, who hopes to make his own recommendations to President George W. Bush by the end of 2005.
The report, which was unanimously approved by panelists, contained two proposals: "The Simplified Income Tax Plan" and "The Growth and Investment Tax Plan." They are identical in many provisions, but differ in the taxation of business and investment income. The plans are revenue-neutral when measured during the next 10 years, stated panel Chairman and former Sen. Connie Mack (R-Fla.).
The Simplified Income Tax Plan would establish four income tax brackets, at 15, 25, 30 and 33 percent. The Growth and Investment Tax Plan proposed three brackets, at 15, 25 and 30 percent.
Both plans would repeal the corporate and individual alternative minimum tax. They also would replace the personal exemption, standard deduction, and child tax credit with a new Family Tax Credit available to all taxpayers regardless of whether they itemize.
The plans propose replacing the current mortgage interest deduction with a credit equal to 15 percent of mortgage interest paid during the tax year, also available regardless of itemizing. The credit would be capped to 1.3 times the Federal Housing Administration mortgage limits, ranging by geographical area from $227,000 to $412,000. The cap would affect less than five percent of all mortgages, and most of the current benefit capped at $1.1 million goes to higher-income taxpayers, said Mack. The current cap skews investment into real estate, he added.
Both plans replace deductions for health insurance by allowing all taxpayers to buy insurance with pre-tax dollars, up to $5,000 for individuals and $11,500 for families. The amounts, equal to the average benefit for federal employees, would be indexed to the consumer price index. Capping health insurance deductions would make taxpayers aware of excessive health care costs and better consumers of medical services, stated panel Vice-Chairman and former Sen. John Breaux (D-La.).
Both plans permit a charitable giving deduction for all taxpayers who donate more than one percent of their income. They also replace 15 different tax provisions for defined contribution plans, defined benefit plans, retirement savings plans, education savings plans, and health savings plans with three new flexible savings accounts: Save at Work, Save for Retirement, and Save for Family.
Neither plan would allow a deduction for state and/or local taxes.
The plans differ on the taxation of businesses and capital. The Simplified Income Tax Plan would exclude 100 percent of dividends from domestic companies paid out of domestic earnings. It also would exclude 75 percent of corporate capital gains from domestic companies. The Growth and Investment Tax Plan would tax all dividends and capital gains at 15 percent.
The Simplified proposal would tax small businesses at individual tax rates, while the Growth proposal would use individual rates for sole proprietorships and a 30 percent rate for all other small businesses. The Simplified proposal also would tax large businesses at a 31.5 percent rate, while the Growth proposal would tax them at 30 percent.
The panel did not use dynamic scoring when weighing proposals, though they encourage its adoption, stated Mack. Dynamic scoring recongizes that tax cuts do not result in an equal loss of revenue to the government, but in fact result in greater revenues due to increased economic growth resulting in a larger tax base. They also assumed that the tax cuts made in the Economic Growth and Tax Relief Reconciliation Act of 2001 and Jobs and Growth Tax Relief Reconciliation Act of 2003 would be made permanent.
The panel considered a consumption tax but was unable to reach a consensus on a recommendation. It also rejected proposals for a value-added tax and a national retail sales tax. Panelists did not consider estate tax reform because their purpose was to concentrate on individual and business taxes, added Mack.
Receiving the recommendations, Secretary Snow commented that they will be the "starting point" for his own proposals that he will send to President Bush. Snow would not set a deadline as he received the recommendations on November 1, but hoped that he could have them ready by the end of 2005. He encouraged people to study the proposals as a whole instead of individual pieces, such as the controversial proposal to cap the mortgage interest deduction. The more individuals understand the proposal, the more they will support it, he predicted.
White House Reaction
White House Press Secretary Scott McClellan commended the tax reform panel for completing its work and said President Bush will outline ways to make the tax system "simpler, fairer and more conducive to economic growth" once he receives Snow’s recommendations. McClellan did not offer a timetable for unveiling the president’s tax reform proposals but said Bush would "make decisions in due course."
The administration looks forward to "moving forward on initiatives that the president will outline later with members of Congress," McClellan advised. Asked about specific recommendations made by the tax reform members, such as eliminating the state and local tax deduction or placing limits on the home mortgage tax break, McClellan said he would not comment "on something that the president has not decided on."
House of Representatives Reaction
House lawmakers appeared unlikely to immediately draft legislation that embodies the recommendations of the tax reform panel, instead they spent time on November 1 criticizing and praising aspects of the report and debating the effectiveness of tax cuts to spur the economy.
House Majority Whip Roy Blunt (R-Mo.), the acting majority leader, said the report would be carefully studied by GOP lawmakers, who plan to engage in a broad debate within the Republican conference about the recommendations. House Ways and Means Chairman William M. Thomas (R-Calif.) said the tax panel report would help Congress to make changes to the tax code that balance revenue collection with job creation.
House Minority Whip Steny Hoyer (D-Md.), however, said the tax panel report advocates shifting the tax burden to the middle class without addressing the federal budget deficit. "The Panel's recommendations are unfair and unwise," added Ways and Means Ranking Democrat Charles B. Rangel (D-N.Y.), who called on the Bush Administration to show leadership by rejecting the proposals that hurt the middle class, such as ending the deduction for state and local taxes.
The report comes just as lawmakers are putting the finishing touches on a tax reconciliation measure that includes $70 billion in tax cuts. Blunt speculated that the House could vote on a tax reconciliation package as early as next week, but not actually go to conference with the Senate until next year.
Blunt also charged that Democratic lawmakers mistakenly believe that cutting taxes will increase the federal budget deficit, when in fact, tax cuts will spur economic growth. He said Democrats do not understand that raising taxes would decrease revenue by slowing the economy down.
Senate Reaction
Senate Finance Committee Chairman Charles E. Grassley (R-Iowa), who had earlier panned many of the panel’s recommendations, offered cautious praise of the final report, calling it a "starting point" in simplifying an admittedly complex tax code.
"The complexity means taxpayers can’t be confident that they’ve received all the breaks coming to them, or that they haven’t paid more than they owe," said Grassley. "They need more confidence in the system, and the tax panel’s product should promote a lot of discussion of how to build that confidence."
Grassley noted that Congress has chiseled away at tax code complexity, pointing to a key change in establishing a uniform definition of a child for several tax provisions. "We need a lot more of those common-sense simplifications," he said.
Grassley steered away from the kind of harsh remarks he made to reporters on Oct. 18 when he called the commission’s recommendation to find offsets for resolving the alternative minimum tax issue "ridiculous," and said many of its ideas were dated and failed to muster widespread support when initially offered.
Instead, the senior tax writer said in a prepared statement that he planned to hold Finance Committee hearings on the tax reform panel’s report as soon as possible and was looking forward to recommendations from the Administration in the coming weeks.
Senate Finance Committee member John F. Kerry (D-Mass.) labeled the advisory panel "doomed" from the start because of President Bush’s insistence on making permanent $1.3 trillion in tax cuts "skewed to the wealthiest Americans."
"There was little the panel could do to address the gaping trillion-dollar hole in our budget," said Kerry. "If we want reform, we need to put fairness, opportunity and simplicity first."
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Added to the news on November 28, 2005.
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