President Bush asked Congress on Monday to slash taxes by $1.9 trillion over the next decade, cementing his first-term tax cuts while changing the way health insurance is taxed.
The lion's share of the president's proposed tax reductions would come from making permanent his signature cuts enacted in 2001 and 2003, at a cost of $1.6 trillion over the next 10 years. Those cuts would otherwise evaporate at the end of 2010.
"Well-timed, pro-growth tax policies helped create the right climate for innovation and entrepreneurship," powering a resilient economy, Bush said in his budget message.
The president also proposed a variety of individual and business tax breaks, including incentives for retirement and health care savings. He asked for an extension of a popular research and development tax credit, at a cost of $117.3 billion over 10 years. The cost of extending Bush's earlier tax cuts would be $146.5 billion in 2011 alone — the first year after they are set to expire.
Bush called for a change in the way the tax code treats health insurance as part of a complex plan to expand coverage to the uninsured. His plan would end the tax-exempt status of employer-provided health insurance payments, and give families a $15,000 deduction for buying medical coverage. Employer contributions that exceed the deduction amount would be taxed.
Other options for tax-free health spending, such as setting aside money in a Flexible Spending Account, would also end under Bush's proposal, according to details provided by the Treasury Department. Taxpayers could still save tax-free for a dependent's medical expenses.
The plan would go into effect in 2009. It would cost $121.2 billion over its first three years but would ultimately pay for itself, according to Bush's budget estimates.
Democrats have assailed the proposal as an inadequate solution to covering the uninsured, noting that it could penalize some workers who receive generous employer-furnished health coverage.
Bush's budget said it would "level the playing field for Americans who purchase health care individually rather than through their employers."
The president did not propose a permanent fix for the alternative minimum tax, a complex system created to ensnare wealthy tax-dodgers but which is increasingly hitting middle-class families. As he has in past years, Bush instead asked Congress to preserve a temporary change to blunt its effect for another year.
Sen. Max Baucus, D-Mont., the Finance Committee chairman, said he would like to see Bush's 2001 tax cuts extended, but faulted the president for leaving out the cost of addressing the alternative minimum tax, which he called "a far more immediate threat to American families."
Treasury estimated that the alternative minimum tax was paid by 4 million people last year and predicted that some 25 million can expect to pay it next year without a change in law.
Bush's budget also proposes tackling the "tax gap" — the estimated $290 billion difference each year between what taxpayers owe and what they pay. He called on Congress to add $409 million to the Internal Revenue Service's budget next year to address the problem, and to pass a host of measures designed to improve compliance with tax laws.