WASHINGTON – The advisory panel commissioned last January by President Bush handed in on Tuesday its ideas for improving the nation's tax code. The panel suggests some major changes and gives the president several options, but many of the recommendations may not be popular with the public.
The bipartisan group said its recommendations were meant to take some of the pain out of paying taxes by making the tax code simpler and fairer.
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"And so we, in essence, turn the ball over to you," commissioner Connie Mack told Treasury Secretary John Snow when handing over the report.
The commission wrapped up its work last month before writing the report.
"We take the ball. It's our turn to run with it," Snow said.
"[The Treasury Department will] take the report, review it carefully, understand the implications and use the report as a starting point for recommendations that we will make to the president," he said.
After evaluating the suggestions, Snow will send his own version of the report to the president.
Among the recommendations are two separate plans that would change every nook and cranny of the tax code. One basic recommendation is a simplification of the basic annual IRS form.
"This is the proposed 1040 simple form. We basically have gone from 75 lines to 32 lines," Mack said.
Another of the key recommendations is to eliminate the Alternative Minimum Tax (search), which Mack said is scheduled to raise taxes on more 21 million people next year if it is not abolished.
Because of inflation, tens of millions of middle-income taxpayers would have faced a huge tax increase, $30 billion more just next year, as a result of the AMT.
"That's $1.3 trillion estimated cost over 10 years. So that was, sort of, an easy thing to recommend," said commission vice chairman John Breaux.
But to pay for the losses from AMT, other changes had to be made.
Those changes include an end to the deduction of state and local taxes, and limiting the popular home mortgage tax deduction.
Taxpayers can now deduct interest on mortgages up to about $1 million. The new maximum would be $412,000, even lower in less expensive areas.
"Less than 5 percent of the mortgages in the country are above that cap, less than 5 percent," Mack said.
And instead of a deduction, taxpayers would get a dollar for dollar tax credit equal to 15 percent of the total mortgage.
The mortgage industry did not like the proposal. "When people purchased their homes, it was assumed that this would be in place," said Roy DeLoach of the National Association of Mortgage Brokers.
People with expensive health insurance plans may also face more taxes. If employers spend more than $11,500 for a family's health insurance, every dollar over that would be taxed as income.
"I think this is a positive move in the sense of connecting people with the cost of their health plans," Breaux said.
Other changes include breaks for small business, which is responsible for the creation of the majority of new jobs.
Under one plan, individuals would pay no tax on dividends paid by U.S. companies and exclude 75 percent of their capital gains from taxation. Under the second plan, all investment income would be taxed at 15 percent.
The President's Advisory Panel on Federal Tax Reform spent most of the year studying tax designs, including consumption taxes like a national retail sales tax, but ultimately rejected them.
Certain limits were set on the panel. Bush required that their recommendations collect roughly as much tax money as the government collects now.
The proposals also had to retain the progressive system that taxes wealthier taxpayers at higher rates than poorer individuals and families. They were also required to recognize "the importance of homeownership and charity in American society."
Some of the recommendations are sure to be controversial. A former Democratic senator, Breaux said it was easy for the nine-member panel to make the proposals because they're not running for re-election.
The tax-writing House Ways and Means and Senate Finance committees pledged to take a close look at the recommendations.
The Associated Press contributed to this report.