BY BRIAN TUMULTY
GANNETT NEWS SERVICE
WASHINGTON - Taxpayers would be able to file their federal income tax returns on a 42-line, 4-by-6-inch card if Congress and the administration eventually accept recommendations issued Tuesday by the President's Advisory Panel on Federal Tax Reform.
The tradeoff in achieving such simplicity, however, would be a controversial proposal to eliminate popular deductions such as the one for state and local taxes.
And the current interest deduction for mortgage loans of up to $1.1 million for primary residences and vacation homes would be scaled back. The new ceiling would be a much lower regional average ranging between $227,000 and $412,000 for primary residences only.
According to the tax panel, only 54 percent of taxpayers who pay interest on their mortgages claim a tax deduction, largely because many don't itemize their tax returns.
Treasury Secretary John Snow said his agency would review the findings and use it to make its own recommendations to the White House before the end of the year.
Question: What does this proposal do?
Answer: It creates a simpler tax system and decreases the number of taxpayers forced to pay the 28 percent Alternative Minimum Tax. The AMT prevents tax avoidance by affluent taxpayers and some corporations who claim excessive tax write-offs. "If we don't anything, 29 million Americans are going to have to pay it next year," said Joel Slemrod of the University of Michigan's Office of Tax Policy Research.
Q: Won't that cut revenue?
A: Yes. Eliminating the AMT will result in the loss of $1.3 trillion in future tax revenue, according to former Sen. John Breaux, a member of the tax reform panel.
Q: How would that lost revenue be recovered?
A: Largely through eliminating the deduction for state and local taxes as well as putting a cap on the deduction for home mortgage interest.
Q: What about second homes?
A: That mortgage-interest deduction would be eliminated.
Q: What are the other highlights?
A: There are two proposals. One is called the Simplified Income Tax Plan that would have four tax rates of 15 percent, 25 percent, 30 percent and 33 percent. The other is the Growth and Investment Tax Plan that would have three income tax brackets of 15 percent, 25 percent and 30 percent. The current top rate is 35 percent.
In addition, both plans create a simplified family tax credit that replaces the multiple personal exemptions, standard deductions, child tax credit and earned income tax credit in the current tax code.
Q: What about businesses?
A: Small businesses would be taxed at no more than the top individual rate of 33 percent and large businesses would be taxed at 31.5 percent under the Simplified Income Tax Plan. The Growth and Investment Tax Plan would apply its three income tax rates of 15 percent, 25 percent and the top rate of 30 percent to small businesses. Large businesses would pay 30 percent.
Q: Will President Bush accept the report, modify the suggestions or reject it?
A: "The president is going to make the decisions in due course," White House spokesman Scott McClellan said Tuesday. Some lawmakers think Bush may not weigh in with his position until his State of the Union address early next year, when he lays out his agenda for 2006.
Q: When will Congress weigh in?
A: Some Republican and Democratic lawmakers reacted immediately. Senate Finance Committee Chairman Charles Grassley, R-Iowa, said he would hold hearings on the panel's recommendations. "Some of their recommendations are bound to be politically unpopular," Grassley stated. "Cutting the home mortgage interest deduction is an example. But it's important to have a comprehensive starting point that will get everyone talking and thinking."
Rep. Charles Rangel of New York, ranking Democrat on the House Ways and Means Committee, said the elimination of the deduction for state and local taxes would increase taxes on 45 million taxpayers. "The panel has set back, rather than advanced, the prospects for reform by failing to offer realistic proposals that fairly distribute the tax burden across income levels and the states," said Rangel.
Q: When might Congress act on legislation?
A: It's too late for this year. And since the House and Senate are up for election next November, the issue may carry over until 2007 or 2008.
Q: Who made these recommendations?
A: Appointed by President Bush last January, the nine-member panel included former members of Congress and tax experts. Their mission was to find a simpler, fairer, growth-oriented and revenue-neutral tax system.
