Tax changes afoot, but not soon
Controversial panel's report starts process
Cox News Service
October 30, 2005
By the end of Tuesday, President Bush's tax advisory committee is expected to present a final version of a sweeping reform proposal.
The proposal suggests eliminating the ever-encroaching alternative minimum tax, streamlining tax paperwork for individuals and families, cutting back taxation of investment profits, eliminating deductions for state and local taxes, and putting some crimps into tax breaks for homeowners.
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There is even more, but that's enough to indicate how extensive and potentially controversial the proposal is.
If Congress and President Bush approved the whole thing, it would be the most significant overhaul of income tax law since 1986, when Ronald Reagan was president.
But don't hold your breath.
"I don't think the same consensus is here as there was in 1986," said Mark Luscombe, a principal analyst with CCH, an information service for tax professionals. "You will see all these proposals being picked at. There has to be a lot of consensus to overcome all those people lobbying against various provisions, and I just don't see that."
He and many others expect that Bush will build his own tax reform proposal, grafting on the parts he likes from his bipartisan advisory committee and unveiling the package in the State of the Union address. When their turn comes, congressional tax writers will toss out the parts they don't like and write their own bill.
Even then, experts don't expect any new provisions that apply to 2005 taxes. "Any changes would definitely be forward-looking," said Donna LeValley, a contributing editor to one of the big books of tax advice for individuals, "J.K. Lasser's Your Income Tax Guide 2006."
On the other hand, the Bush committee's proposal may help keep some concepts alive. "Certainly a lot of ideas die one year and come back another," observed Bob Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a newsletter for tax professionals. "Just broaching the topics opens the way for more serious discussion in the future."
All of this suggests that average people — as citizens, taxpayers and voters — ought to learn a little about the Bush commission's proposals. Here are some high spots:
• Alternative minimum tax. In an early, bedrock decision, the commission decided the AMT should be eliminated entirely.
The AMT was originally established to make sure that the very rich paid some tax, no matter how many deductions, credits and finagles their advisers figured out. But the AMT has not been adjusted for inflation, with the result that millions of not-rich people have gotten caught or soon will be. That means their tax bills will go up significantly.
Eliminating the AMT would cut federal tax collections by $1.2 trillion over the next 10 years. How huge is that? Almost as big as the $1.35 trillion tax cut of 2001, which was the biggest dollar amount since Reagan was president.
This time around, Bush told his advisory committee to make sure its recommendations were "revenue neutral," meaning they would not change the amount of taxes collected under current law.
That is why many of the other changes suggested by the committee are attempts to pull $1.2 trillion out of other pockets.
• Paperwork. The commission unveiled a new version of Form 1040, the basic document filed by individuals. Its revised version contains 32 lines, down from 75 in the form now in use.
The number of supporting forms, used to report various kinds of income, expenses and other information, would be cut from about 50 to 10. But as the forms disappear, so do some tax breaks.
• Investment tax breaks. There are two choices. One would eliminate taxes on all dividends paid by domestic corporations and 75 percent of capital gains from the sale of domestic corporate stock.
The second, sometimes identified as a "progressive consumption tax," would establish a 15 percent tax rate on all interest, dividends and capital gains.
There are many more details in each proposal. Either way, the winners would be those with significant investments in taxable accounts.
• State and local taxes. The commission would eliminate deductions for these taxes. States with high income tax rates are automatically against it. The same goes for those states, including Texas, that depend more heavily on sales taxes and only recently won the right to deduct them from taxable federal income.
• Homeowners. The home mortgage interest deduction would be eliminated and replaced with a credit worth 15 percent of interest paid during the year. The credit could be claimed only on mortgages up to a certain size, usually $300,000 or less. The credit would not apply to mortgages on second homes or on home equity loans.
Those provisions, like many others, were presented as an effort to target the breaks to low- and moderate-income households.
• The rest of it. The committee also suggested big changes in tax rates, standard deductions and other deductions, and tax-favored savings accounts, including individual retirement accounts, 401(k)s and flexible spending accounts.
What does it all mean? Only our elected leaders can tell us, and they won't start slicing and dicing until sometime next year.
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