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Presidential tax panel outlines bold changes to popular tax breaks

WASHINGTON—The chairmen of President Bush's special tax-advisory panel outlined a controversial plan Tuesday to overhaul the nation's tax code by cutting popular tax breaks.

The committee would reduce mortgage-interest deductions, treat some health-care benefits as taxable income and eliminate the federal deduction of state and local taxes from taxable income.

However, with Bush's poll numbers plunging, Republican congressional leaders indicted or under federal investigation and midterm congressional elections next year, it's unclear whether lawmakers will want to risk a public backlash by trimming popular tax breaks.

The bipartisan panel, chaired by two former senators, will send the Bush administration a plan to overhaul the tax code by Nov. 1. Bush had asked it for ideas to simplify the tax code and promote economic growth while not adding to the national debt or reducing revenues. The president is expected to recommend tax-code changes to Congress next year.

The committee proposes to cut the cap on interest deductions for home mortgages; taxpayers could deduct interest for only the first $350,000 of their mortgages, rather than the first $1 million. The panel also proposes that employer-provided family health-care plans valued above $11,000 and individual plans worth more than $5,000 be treated as taxable income. Currently, health-care benefits aren't subject to taxation.

The panel would collapse the current six tax brackets into four, with the top rate remaining at 35 percent and three-quarters of taxpayers in the bottom bracket of 15 percent.

The panel calls for cutting the tax rate on personal-investment income such as interest on bank accounts, which currently is taxed at the same rates as other income. The committee would lower it to a flat rate of 15 percent.

It also would lower the corporate tax rate from a maximum 35 percent now to a flat rate of 32 percent. Businesses would lose a number of write-offs for depreciation of equipment but could immediately write off much other capital-intensive investment.

The panel's threat to the mortgage-interest deduction is already controversial.

Jerry Howard, the chief executive officer of the National Association of Home Builders, called it reckless, adding: "Most Americans have a good portion of their retirement dreams tied up in the equity of their home."

California State Treasurer Phil Angelides held a hasty news conference in Sacramento on Tuesday to decry the proposed cap on the mortgage-interest deduction.

"Capping the mortgage deduction at a level below the median price of a California house would cost middle-class families billions more," he said, estimating a mortgage cap of $312,000 for Californians when the median home price is $568,000.

"These recommendations may be good for Texas, but they certainly aren't good for California," he said.

The committee also suggests abolishing the alternative minimum tax. It was designed to prevent the wealthy from evading taxes, but as wages and salaries have risen over time, it now hits much of the middle class.

Panel Vice Chairman John Breaux, a former Democratic senator from Louisiana, said offsetting the AMT would mean finding new tax revenues.

"That's $1.3 trillion over 10 years, so how do we pay for it? We made some tough recommendations," Breaux said. The panel's chairman is former Sen. Connie Mack, R-Fla.

Sen. Charles Schumer, D-N.Y., fired off a statement calling the proposal "a dagger to the heart of New Yorkers," vowing "we will do everything in our power to defeat this pernicious proposal."

Outside the panel's final hearing, the group Fairtax.Org, which advocates a national retail sales tax, picketed on the grounds that taxes wouldn't be simplified under the committee's recommendations.

"This only complicates the tax code, which is over 50,000 pages, and it doesn't do anything to help with the progressivity of it," said Micah Martello, who heads the group's North Carolina office in Chapel Hill.

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For more information online, go to:

www.taxreformpanel.gov

www.fairtax.org

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(c) 2005, Knight Ridder/Tribune Information Services.

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