Federal income-tax overhaul recommended

WASHINGTON — A presidential commission recommended an overhaul of the federal income tax that would lower rates, reduce paperwork and eliminate or scale back most tax breaks, including popular deductions for home mortgage interest and employer-provided health insurance.

The proposals, presented to Treasury Secretary John Snow on Tuesday, face a long and rocky road before anything like them can become law. But Snow said he hoped to refine the suggestions for President Bush by year's end and expressed optimism that Congress would enact a version of them.

"We will take the ball," Snow said. "It's our turn to run with it."

The President's Advisory Panel on Federal Tax Reform unanimously backed two plans that differ primarily in the way that businesses would be treated. Both plans would streamline the tax system in many places, but they would also complicate tax benefits for wealthy individuals.

Both plans would decrease the number of tax brackets, bolster incentives for saving and investment and repeal the provision considered the current system's costliest weakness: the alternative minimum tax. The AMT was originally designed to force millionaires who took extensive advantage of loopholes and tax shelters to pay at least some taxes, but it now threatens to increase taxes on moderate-income families.

The first proposal, labeled a "simplified income tax plan," would reduce the number of tax rates for individuals to four from six and set the top rate at 33 percent, down from 35 percent. The second proposal, called a "growth and investment tax plan," would slice the number of individual tax brackets to three and set the top rate at 30 percent.

Both plans would consolidate the personal exemption, the standard deduction and the child-care credit into a single "family credit." The earned income tax credit and related subsidies for low-income workers would be collapsed into a "work credit."

The long list of tax breaks now available that promote saving — for education and individual retirement accounts, among others — would also be simplified into three tax-free accounts: "Save at Work," "Save for Retirement" and "Save for Family." Low-income families would receive an additional "savers credit."

Such consolidations would drastically shorten the forms taxpayers use to file their income-tax returns. Panel Chairman Connie Mack, a former Republican senator from Florida, said millions of taxpayers would be able to convert their multipage filings into a single, 4-by-6-inch card printed on both sides.

The panel urged that the mortgage-interest deduction be reduced for the highest-income Americans. Currently, interest paid on mortgages of up to $1.1 million can be written off. Under the plan, only the first $227,000 of a mortgage in inexpensive housing markets could be used to reduce taxes. In pricier places, the cap would be set at $412,000.

The deduction for home mortgage interest would be converted to a credit: Instead of deducting interest payments from taxable income, taxpayers would subtract 15 percent of the interest payments from their taxes owed.

Compiled from The Washington Post, The Associated Press and the Los Angeles Times