April 29, 2005
Friday

Washington - Now that April 15 has come and gone, taxpayers face another deadline: Friday is the last day to tell President Bush's advisory commission on tax reform what you'd do to make the code simpler, fairer and more pro-growth.

The nine-member panel will propose major changes by July 31 to a tax code it calls "unstable and unpredictable."

Alternatives include streamlining the income tax the way the last revamp did in 1986. Among other options: Whole new tax systems, including a national sales tax or European-style value-added tax. Or maybe a flat tax that taxes all income at one rate.

After seven hearings with tax experts the last four months, the commission chair, former Sen. Connie Mack, R-Fla., says it's time "for input from across the country."

The rules for submitting comments are online at www.taxreformpanel.gov/contact. The Web site also has experts' suggestions and other public comments.

Proposals should fit the president's goal of simplifying the code without stripping it of progressive features that have wealthy Americans pay more of their income than lower-income taxpayers.

Bush also says that changes must be revenue-neutral, raising no more and no less than the $2 trillion the income tax brings in; that they must encourage investment and growth and that they must preserve two popular tax breaks: the $76 billion mortgage-interest deduction and the $30 billion write-off for charitable contributions.

But other popular write-offs didn't make Bush's don't-touch list:

• State and local income taxes worth $46 billion a year.
• Home-sales capital gains exclusions, worth another $36 billion.
• The $15 billion for state and local property taxes.
• The medical-expense deduction worth $9 billion, plus $150 billion in health-care tax breaks including the more than $130 billion employers get for employee coverage.

These tax breaks and everything else are on the table in hopes of replacing the current tax code, which costs $140 billion annual to enforce. Put another way, the average American family spends $1,000 a year in time and money on tax compliance.

But remember: Tax reform will make for winners and losers.

So far, commission members agree that there may be too many tax breaks. More than 14,000 have been added since the 1986 overhaul. Besides the big-ticket deductions listed above, tax-break frenzy includes:

• At least nine college-education write-offs worth $4.9 billion a year including two kinds of tax credits, a deduction for student loan interest and tax-free state and private 529 college savings plans, named for their section of the tax code. These tax breaks come with four different income measures, six income thresholds and three different definitions of what educational services qualify.
• More than a dozen tax-favored retirement savings plans. The various 401(k), IRA, SEP and SIMPLE plans have different income requirements for eligibility, contribution limits, hardship withdrawal requirements and tax treatment, prompting Internal Revenue Service Taxpayer Advocate Nina Olson to urge more uniformity for hardship withdrawals and the like.

There are tax breaks for children, child care and adoption; hybrid cars, biodiesel and ethanol; teacher-bought school supplies, the blind and the elderly, repatriated corporate profits and business research and investment.

Likewise ripe for simplification, if not outright repeal, is the Alternative Minimum Tax, a parallel income tax added in 1969 to make sure 155 ultra-rich Americans would pay at least a little to Uncle Sam.

Never adjusted for inflation, the AMT will hit 3.4 million taxpayers this year and as many as 50 million 10 years from now, including people making as little as $50,000.

Economist Len Burman, co-founder of the nonpartisan Tax Policy Center, calls it "a class tax that's become a mass tax." He tried reading the IRS instructions for Alternative Minimum Tax compliance to the advisory commission only to acknowledge, "I don't know what that means. That's why I use TurboTax."

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