December 13, 2005
Tuesday

WASHINGTON - President Bush drew cheers when complaining that the tax code was a "complete mess" during the 2004 campaign, but there's been no rush to change it since his handpicked advisory panel came up with two ways to streamline the income tax.

Contrary to expectations that the administration would make reform the domestic focus of the president's new budget, such plans likely will be delayed until after the 2006 congressional elections - and maybe even after Bush leaves office.

Tax reform didn't make it onto the new White House "economic priorities" list. And Treasury Secretary John Snow, who has the task of sorting through advisory-panel ideas, now says: "We're not going to put a timetable on this thing: We're going to give the president well-considered proposals, and then he will decide where he wants to go."

Nor is the White House pledged to sign onto panel recommendations: "We're open to other ideas," says chief Bush economic adviser Allan Hubbard.

The panel offered two options Nov. 1 that drew mixed reviews - along with outright opposition from the housing and health-care industries, and state and local officials. The choices are:

- A simplified income tax that limits home-mortgage deductions and employer health benefits and ends the state and local tax write-off to pay for killing the Alternative Minimum Tax, a parallel code that's about to hit one in three taxpayers.

- A "growth and investment" consumption tax that was scantily sketched out. Former Sen. Connie Mack, R-Fla., the panel chairman, predicts that successful reform will build on a simplified version of the current income tax.

But as John Breaux, a Democratic former senator from Louisiana and the panel's co-chair, notes, tax reform is just plain taxing when "everything you give with one hand and take away with another makes for difficult politics."

That's been the case with the last three significant reform efforts, in 1969, 1977 and 1986. Each percolated for years, including President Ronald Reagan's 1986 overhaul. It was built on three U.S. Treasury studies and spurred by a Democratic alternative that then-Sen. Bill Bradley of New Jersey and then-House Democratic leader Dick Gephardt of Missouri put forward to close loopholes and abolish tax shelters so that rates on individuals could be lowered.

Since 1986, however, more than 14,000 changes have been made to the tax code, each with its own constituency arguing against change.

Nor is there any group demanding radical reform, "and if the major beneficiaries don't get out front, it's not gonna happen," says former Rep. Bill Archer, R-Texas, who pushed to replace the income tax with a national sales tax as chairman of the tax-writing House Ways and Means Committee.

Today's poisoned partisan atmosphere also corrodes the trust that tax reform requires.

Yet to succeed, tax bills require that lawmakers and administration officials "avoid berating colleagues," says tax lawyer Pamela Olson. As Bush assistant treasury secretary for tax policy, Olson warned before the 2004 presidential race that tax reform would touch off a pitched battle between winners and losers.

Her Treasury predecessor, Mark Weinberger, a key negotiator on the 2001 tax cuts, adds: "You need a precipitating event to force big policy changes in Washington." Weinberger, now vice chair of tax services at the global accounting firm Ernst & Young, foresees demographic forces converging on a "triple witching hour" in 2008. Then:

- The first wave of the 76 million baby boomers starts drawing Social Security, whose $190 billion-a-year surplus currently masks the size of the federal deficit.

- The first major provisions of the Bush 2001 and 2003 tax cuts expire, along with their $1.5 trillion, 10-year price tag for re-enactment.

- The Alternative Minimum Tax hits 30 million households, who would see their yearly tax bill jump an average of $2,000. These include folks making as little as $50,000 a year, absent a $1.3 trillion legislative fix.

Other experts in both parties agree that tax reform will happen in its own time as long as Congress and the White House don't buy off on the advisory panel's call to clamp down on the sacred cows of the mortgage interest and state and local tax deductions that have been in the Internal Revenue Code since it was first enacted in 1913.

As for curbing tax breaks for "gold-plated" health-care benefits, as the panel recommended, odds are that such moves will be saved for any health-insurance reforms rather than be used to offset tax breaks as part of a tax-code overhaul.

Panel recommendations to collapse the standard deduction, personal exemptions and child credits into a single "family tax" credit get high marks as a way to simplify taxes for most families, says House Ways and Means Democratic tax counsel John Buckley, another tax-reform veteran.

But he says that would merely eliminate three or four lines on the 1040 tax form for the 75 percent of taxpayers who don't itemize and don't have a big stake in changing the tax code.

For the other 25 percent of taxpayers who do itemize and bank on those deductions, exclusions, credits and tax-free fringe benefits, Buckley says, "Tax simplification can't be measured by the number of provisions you repeal and lines you remove from tax forms. A very few people are affected by these provisions, but if you kill them, these taxpayers won't be grateful."

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