Tuesday, November 1, 2005

President Bush’s tax-reform commission yesterday proposed a sweeping package of changes to dramatically simplify filing forms, eliminate popular tax breaks and curb deductions for home mortgages and employer-provided health insurance.

Administration officials and congressional leaders praised the recommendations as a good start. But critics said the proposals, in the name of keeping the reforms “revenue neutral,” would raise taxes on middle-income homeowners and employees, hit taxpayers in higher-income states and preserve income-tax rates that they say are still too high.

The President’s Advisory Panel on Federal Tax Reform rejected the idea, pushed by conservative tax cutters, of replacing the multiple-bracket tax code with a single-rate flat income tax or a national retail sales tax. Instead, they submitted a menu of options that would institute a much simpler tax system by eliminating or cutting back on most taxpayer deductions and credits and plowing the money saved into increased tax incentives to encourage workers to save and invest.

But the panel’s proposals to sharply limit the tax deduction for mortgage interest payments, eliminate deductions for state and local taxes, and impose taxes on imports met with immediate opposition from members of Congress, state officials and business groups.

Treasury Secretary John W. Snow praised the “sweeping recommendations,” which he said could be included in the proposals he will send to Mr. Bush in preparation for a plan that the president will give to Congress early next year.

Rep. Bill Thomas, California Republican and chairman of the tax-writing House Ways and Means Committee, also commended the panel, promising that his committee’s review will include “a close inspection of the policies suggested by the panel in the months ahead.”

His Senate counterpart, Finance Committee Chairman Charles E. Grassley, Iowa Republican, said he will hold hearings on the reforms “as soon as possible,” though he acknowledged that some of the proposals, such as cutting the mortgage interest deduction, “are bound to be politically unpopular.”

Members of the bipartisan panel had no illusions that the task of eliminating or changing tax breaks for numerous special interests would be easy.

“The effort to reform the tax code is noble in its purpose, but it requires political willpower,” the panel said in a letter to Mr. Snow. “Many stand waiting to defend the breaks, deductions and loopholes and to defeat our efforts.”

The National Retail Federation condemned the proposal to tax imports, saying it would drive up the cost of most consumer products. “We’re talking about everything from underwear to gas for our cars, and virtually all of the toys that go under the tree during the holidays,” said NRF President Tracy Mullin.

Sen. Jim DeMint, South Carolina Republican, said the report “includes some good ideas, but it leaves many out. These recommendations are small and quite complicated, and that’s exactly what we’re trying to get away from.”

House Democrats said the proposals would shift tax burdens to lower-income workers.

“Those who earn their living by the sweat of their brow, go to work every day, work hard, play by the rules, are hurt by this bill, while [investors] are helped by this bill,” said Minority Whip Steny H. Hoyer, Maryland Democrat.

Rep. Rahm Emanuel, Illinois Democrat, said the recommendations at their root just shift around tax credits and deductions, without helping the middle class or reducing the deficit, which are key tax-reform goals of Democrats.

• Stephen Dinan contributed to this report.

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