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Tax proposals meet stiff opposition

One policy-maker's target is another's valuable deduction

Author: Pamela Yip

Published: November 2, 2005

Americans' ambiguous feelings about their income tax system were on full display Tuesday.

Nearly everyone agrees that the tax code is bloated, confusing and in need of reform.

But any attempt to simplify it is met with howls of protest from interest groups who don't want their tax deductions simplified out of existence.

Such was the case with President Bush's Advisory Panel on Federal Tax Reform.

On Tuesday, it proposed equalizing some tax benefits and drastically simplifying the system that makes Americans tear their hair out every tax-filing season.

Hot-button proposals in the 272-page report included limiting the popular home mortgage interest deduction and taxing employees on the value of the health insurance they receive from their employers, once they exceed a certain limit.

"These would be quite a significant set of changes," said William Gale, co-director of the Tax Policy Center in Washington.

"These are substantial, significant, well-founded ideas that need to be taken together as a package. ... [The panelists] did what they were supposed to do, and they did a very good job."

But tax reform is always a difficult proposition, he said.

"Everyone wants their own subsidies first, and then they'll take simplification," Mr. Gale said.

Indeed, opposition to limiting the mortgage deduction sprang up quickly from lenders.

"When he established this bipartisan panel, the president gave clear direction that any reform must simplify the tax code, be fair, bolster economic growth and support homeownership," said Jonathan L. Kempner, chief executive of the Mortgage Bankers Association.

"Unfortunately, the recommendations issued today that relate to the housing market fail to meet these criteria."

The association also opposes the panel's recommendations to eliminate the deduction on interest paid on home equity loans and to do away with deductions for local real estate and property taxes.

"We cannot support provisions that would harm the housing markets and hurt homeowners," Mr. Kempner said.

An employers' group criticized the panel's proposal to tax employees on the value of health insurance they receive from their employers if they exceed a limit of $5,000 for singles and $11,500 for families.

"If your employer provides a very generous health coverage, then you would be taxed on part of it," explained Bob D. Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal for tax professionals.

Currently, employees aren't taxed on the health coverage they receive from employers.

"The purist attempt at tax fairness by capping health insurance will result in higher taxes and more out-of-pocket medical expenses for the middle class," said Bonnie B. Whyte, president of the Employers Council on Flexible Compensation.

"Health insurance premiums and medical conditions are not based on income, and tax equity will impact those who need group health coverage the most."

In Washington, Treasury Secretary John Snow thanked the panel for its "bold recommendations" but did not commit the White House to supporting any of the ideas.

After a careful review, Treasury will use the report "as a starting point for recommendations that we will make to the president," Mr. Snow said.

Both Democratic and Republican lawmakers took shots at the recommendations. Rep. John Linder, R-Ga., a leading supporter of a national sales tax, issued a statement saying he was disappointed and still hoped Mr. Bush would back "a personal consumption tax on the purchase of new goods and services."

Rep. Lloyd Doggett, D-Austin, a Ways and Means committee member, said the panel "failed to eliminate the multiple complexities and special-interest provisions ... and it wholly dodged the growing problem of corporate tax dodging."

Still, Mr. Gale at the Tax Policy Center held out some hope for simplification.

"Tax reform is always hard but does happen sometimes," he said.