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President Bush Tax Panel Recommendations Go To Executive Branch

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The President's Advisory Panel on Federal Tax Reform submitted its delayed recommendations to Treasury Secretary John Snow on Tuesday. Secretary Snow said he would study the recommendations and report to President Bush before the end of the year.

The panel's recommendations, which were expected four months ago, differed in part from proposals that were outlined earlier and reported here. Those had sent interest groups such as real estate and home building proponents running for their public relations gurus. They don't feel any better about the "final" recommendations, but at least they have a more or less finished model to shoot at.


The panel's recommendations took the form of two separate plans; one would simplify the existing tax code (The current tax code runs to over 60,000 pages). The other would replace the code with a "progressive consumption tax" that would, among other things, slash taxes on capital gains and income with the goal of rewarding savings and investment while discouraging consumption. Both proposals would eliminate most deductions, replacing them with a few tax credits and three savings accounts designed to encourage homeownership, charitable giving, and savings. The proposal was also touted as providing increased support to lower income workers.

Both sets of recommendations were driven by widespread public demand for elimination of the Alternative Minimum Tax (AMT). This tax was put in place four decades ago as a means to tax the wealthy which, with high powered accountants and innumerable tax shelters, often paid no taxes at all. The AMT is not indexed for inflation, and as incomes have increased, more and more middle class families have been ensnared by AMT rules. About 20 million taxpayers will be affected next year compared to 1 million only six years ago, and the Brookings Institution estimates that number will climb to 31 million by the end of the decade.

Repeal of the AMT, however, will eliminate about $1.2 trillion in tax revenues over the next ten years, and the panel had to find ways to make up that deficit.

Among the proposals to compensate for the AMT shortfall is a limitation on employer financed health benefits. The commission suggests limiting the amount of insurance that an employer can provide tax-free to employees to a maximum of $5,000 for an individual and $11,500 for a family. At the same time, taxpayers could deduct the cost of providing their own health insurance up to the same caps if they did not receive health insurance through their employer. This could have the effect of eliminating high end health care plans for executives but might hurt middle-wage earners with handsome benefit packages.

A second proposal is the elimination of the deduction for state and local taxes. While this is clearly a hit for homeowners who can now deduct property taxes on first and second (maybe even third and fourth) homes, it also eliminates the deduction for ad valorum taxes on autos and boats, and the deduction for income taxes levied by local taxing authorities.

As we mentioned last week, however, it is the proposed reduction/elimination of the home interest deduction that has stirred up opposition from every group with a dog in that hunt.

Today taxpayers are allowed to deduct interest payments on home mortgages of up to $1,000,000, typically enough to finance a home costing $1,250,000. With certain exceptions having to do with the original purchase price of the home, this could include interest on a first mortgage, second mortgage and home equity line of credit. These deductions also embrace payments on mortgages for a second owner-occupied home, although we assume that a combined $1 million limit still applies. (If this is a concern for you, read the tax code. .Not even for you, loyal reader, are we going there.)

The recommendations this week are changed a bit from those we reported a few weeks ago. At that time it looked as though the hammer was going to fall on those with mortgages exceeding $250,000 to $350,000, most likely $313,000, an amount that coincides with the current maximum limit for Federal Housing Administration loan guarantees.

It is now suggested that the deduction would be limited to a regionally determined range of $227,000 to $412,000 with the higher amount allowed to those in higher median price areas such as Florida, California, and the Northeast. It is unclear whether the panel intends that amount be the absolute mortgage amount or the amount of the mortgage needed to finance such purchases.

The panel recommendations will eliminate all deductions for mortgage interest on second homes and, by definition, with local taxes gone bye-bye, also rules out deducting property taxes paid on any number of homes other than those classified as investment properties.

Instead of an outright deduction for mortgage interest, the proposed rules would allow a tax credit of 15 percent of the mortgage interest paid which, the panel contends, would be more helpful for low and middle income homeowners. In other words, if you paid $12,000 in interest on your new $200,000 mortgage this year you could deduct $12,000 from your income before computing taxes. Under the proposed rules you would instead receive a $1,800 credit against taxes owed. Every tax payer will have to evaluate his own situation so see how these potential changes will impact his bottom line.

On the income side, one of the two plans suggests that individuals would be exempt from taxes on dividends paid by U.S. companies and could exclude 3/4 of their capital gains. Under the second plan, all investment income would be taxed at 15 percent.

Regardless of any savings that the changes might bring to the taxpayer, the panel suggests that their proposals would shrink the size and complexity of tax forms and reduce the need for seeking professional help every April - which, in itself, can be a substantial savings. The panel's report also insisted that taxpayers would pay about the same amount of tax under the new rules as they do now.



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Comments (17)

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This may have been a good idea back in October, but in the face of the disastrous sub-prime blowup affecting lending in the last few weeks, I cannot see why we need to hit home values TWICE. As it is, jumbo interest rates have skyrocketed to 8% almost overnight, making new home ownership impossible for the $417,000+ range. Now we're going to eliminate the tax advantage as well? The government exists in order to make STRUCTURAL changes that SUPPORT our country, not cripple it!

Above Posted By: Ryan | Tue, 14 Aug 2007 07:05:06 EST

I just purchased my "dream home" and really rely on mortgage interest deductions and property tax credits to live. My wife and I both paid for our own college, pay for our own health care, and work our butts off to make a better life for us and our kids, and this is the thanks we get? Meanwhile jobless illegal aliens are getting free education and medical care. What and the hell is wrong with this country?

Above Posted By: Tim | Fri, 3 Aug 2007 06:45:55 EST

Flat Tax - 10%. Problem Solved.

Above Posted By: Jennifer | Thu, 8 Mar 2007 06:17:12 EST

Doesn't seem right that hard-working people plan for their family's future based on curent tax law only to be jerked around by drastic changes to those laws.

Above Posted By: Anon. | Tue, 18 Apr 2006 16:02:48 EST

Policy Makers Ignore Savings Effect of Home Ownership: Universally in the Advisory Council's statements, home mortgages, home subsidies and home ownership are regarded as harmful, to be discouraged and contrary to good tax policy. Instead, the Policy Makers want to encourage savings. This ignores the fact that most people are saving for retirement by INVESTING in their homes. Their profits will supplement Soc. Security, upon retirement and home downsizing. This Adv. Council ignores this!!

Above Posted By: Alan Tilden | Thu, 16 Feb 2006 19:19:30 EST

American people should be outraged at this proposal, government officials should begin looking at ways to encourage investment and making it easier for all income groups to participate. Any proposed tax adjustments should be placed in the hands of the people by vote, any and all impacts to society must be decided by the majority not some over stuffed displaced-from-reality money sucking bottom dwelleing Congressmen or Senetor enjoying profit on my struggleing hardship. Reduce Government NOW.

Above Posted By: Nick | Tue, 7 Feb 2006 08:45:55 EST

The mortgage deduction already is gone once your Household (not individual) income reaches $200,000. That's how much you need to make in order to afford a median-priced home in Southern California, where I live. How come nobody talks about this?

Above Posted By: Mortgage deduction already gone | Wed, 1 Feb 2006 17:01:48 EST

I'm no longer proud to be a new homeowner. Maybe I'll go back to renting. It's probably where I'll end up in the end.

Above Posted By: Toni | Wed, 1 Feb 2006 15:43:27 EST

i am a single female over the age of 50. I find it very hard to get by with 2 jobs. I count on my credit from intrest paid each year to help me with my taxes. I can't pick up a third job and can't stand the thought of having to try. I agree with the person who sugested our law makers live on what we poor folks do. This is a tragic end to the american dream our military is still fighting for and very hard pill to take. Thank you for allowing me to say my piece.

Above Posted By: upset YES I am | Mon, 30 Jan 2006 04:58:54 EST

BAD IDEA! 1st the middle class foot the cost of the war, then deal with soaring costs of health care, gas & oh yeah, did I mention skyrocketing home prices? Makes ya scared to say "what next?" Last thing this economy needs is to eliminate mortgage interest the middle class homeowners & dutiful taxpayers have earned & worked hard for. I agree wthe previous commentor - lets hold these legislators to the same laws & income limits we regular folk are subjected to & see if they'd agree then!

Above Posted By: Anonymous | Sat, 28 Jan 2006 21:37:13 EST

These rich lawmakers must have a lot of time on their hands thinking up new tax laws to once again lay the burden on the shrinking middle class! Losing the mortgage and property tax deductions would certainly put this country in further jeopardy than it already is under the Bush administration. 2008 can't come soon enough.

Above Posted By: anonymous | Thu, 26 Jan 2006 11:29:58 EST

This would be the BIGGEST SETBACK to an already deminishing middle class! The average home in South Florida is in the $400,000.00's- We are being punished for working hard and wanting a better way of life. WHAT HAPPENED TO THE AMERICAN DREAM?

Above Posted By: Mayra | Wed, 11 Jan 2006 15:44:45 EST

I think our whole tax structure, medical care system as well as our economy would benefit enormously if our legislators were governed by the same income, social security & medical plan options that we regular folk are subjected to. Now there's a petition I would gladly sign.

Above Posted By: anonymous | Wed, 14 Dec 2005 15:47:54 EST

By my calculations, with the $1800 tax credit instead of about a $12,000 deduction, I will pay at least $1750 MORE in income tax. I don't currently pay AMT because I have a modest income. As for saving on tax preparers, I don't think the $35 or so I pay for tax software is very much, and I still would buy it to do my taxes. The other "bubble" that needs to be addressed is the one these proposers are living in. Pop it, fast!!!

Above Posted By: Anonymous | Thu, 17 Nov 2005 21:29:02 EST

This will pop the "housing bubble" because of all investors dumping properties which are no longer profitable (similar to '86-'87). Once investors are no longer interested, property values will shrink and many home owners will be upside-down... certainly not good for the overall economy.

Perhaps it's a dose of medicine we need, but it will not be easy.

Above Posted By: Dan | Tue, 15 Nov 2005 21:21:56 EST

The proposed tax change to 15% of the interest paid is a punch in the face to consumers. We have encouraged home ownership! Put people in homes and now while their struggling with higher interest rates and fewer solutions we want to raise taxes on home ownership. This idea is nuts! Implement this and within three years you will see the housing bubble burst.

Above Posted By: Scott | Tue, 15 Nov 2005 20:52:25 EST

The current housing subsidies:
1) Encourage and reward those taking on the largest possible amounts of mortgage as early as possible.
2) Discourage saving in general, and saving for a home purchase in particular because the savings are at a heavy tax disadvantage.
3) Contrary to popular belief, make housing less affordable by inflating home prices excessively.

It's a good idea to eliminate housing subsidies.

Above Posted By: hari | Mon, 7 Nov 2005 22:22:32 EST


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