Bush expected to delay major tax overhaul
Social Security, budget grab center stage
By Jonathan Weisman and Jeffrey H. Birnbaum
Updated: 1:17 a.m. ET Dec. 28, 2004
Wholesale changes to the tax code that just weeks ago were identified as a Bush administration goal by the end of 2005 are being pushed back for at least another year.
White House economists, Republican tax aides in Congress and outside economic advisers say key White House officials have determined that they have their hands full with Bush's pledge to overhaul Social Security and a budget plan that will demand politically painful cuts to non-defense spending.
The president will soon name a panel to examine tax policy, but he will leave it to the Treasury Department to monitor the panel's work. It is widely expected that Treasury Secretary John W. Snow will ultimately recommend incremental changes to the tax code, not replacing it with a new system, such as a single flat income-tax rate or a national sales tax, according to these sources.
"The likelihood of a really dramatic change is fairly low," said Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute.
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"They're sort of punting," said one economic adviser outside the White House who maintains strong contacts with administration economists, noting that Bush is not likely to turn his attention to the tax issue until 2006, and will do so then only if the Social Security and budget issues have been resolved.
Claire Buchan, a White House spokeswoman, said an overhaul of the tax code remains a Bush priority, noting the White House economic conference this month devoted a panel to tax simplification.
But the president may have tipped his hand during that two-day conference when he devoted his time to Social Security changes and limits on civil lawsuits. His one mention of tax simplification came when he reiterated his support for the permanent repeal of the estate tax, a move Bush said would eliminate 300 pages of the Internal Revenue Code.
"I think the president signaled that he is going 'incremental' on tax reform, not radical," a policy aide who recently left the White House said after Bush's speech.
Since the conference, tax policy analysts and business lobbyists have been looking for clues in a 2002 study done by the Treasury Department. Its author, former assistant Treasury secretary for tax policy Pamela F. Olson, said she has been fielding a steady stream of calls about the report, especially about its fifth, most incremental tax option. "There's certainly a number of people who have read it in recent weeks," she joked.
'Option 5'
Under what has become known among lobbyists on K Street simply as "Option 5," Bush's previous tax proposals would be enhanced, not replaced. Washington would create lifetime savings accounts and retirement savings accounts to replace the current array of tax-preferred savings accounts for retirement, education and health care.
A lifetime savings account would allow each person to save up to $5,000 a year, shielding capital gains, interest and dividend income from all taxation. Unlike existing tax-favored accounts, the money could be withdrawn at any time for any reason. A family of four could shield $20,000 a year from investment taxation, and since few families could save that much, capital gains, interest and dividend taxation would effectively end for the vast majority of Americans, the Treasury study said.
The plan would also repeal the alternative minimum tax, the parallel income tax system that was set up to ensure the rich pay taxes but that increasingly ensnares the middle class. For low- and middle-income taxpayers, the standard deduction would be significantly increased.
The current four tax-filing categories -- married filing jointly, married filing separately, single and head of household -- would be simplified to just married couples and all others. The six current income tax rates -- 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent -- would collapse to four, losing the 28 percent and 33 percent brackets.
And corporations would be allowed to immediately deduct -- or "expense" -- from their taxes a portion of the cost of business investments, instead of having to slowly write off those costs based on complex depreciation allowances.
To cover the cost of the tax changes, the plan would tax the value of an employee's health insurance benefit as if it were income. "Most Social Security benefits" would also be taxed as income, the report says. Finally, the plan eliminates the itemized deduction for state and local tax payments.
Tax lobbyists have seized on the plan because it fits Bush's stated desire to simplify the tax code while maintaining the progressive income tax structure as well as deductions for mortgage interest payments and charitable giving.
"The president is very serious about tax reform," said Rachelle Bernstein, vice president and tax counsel of the National Retail Federation. "The question for all of us is whether it will move away from the income tax system or whether it's significant reform of the current income tax. My bet is it's reform of the income tax," Option 5.
Incremental changes
In an interview, Snow said Olson's tax analysis would inform deliberations, as would previous Treasury studies. "I don't want to go in with a blueprint in mind," he said. "I don't want prior ideas to shape this."
He pointed out that all previous proposals needed to be reexamined. For instance, "expensing," a key feature of Option 5, "clearly simplifies aspects of the corporate income tax," he said. But an immediate write-off for business plant and equipment purchases could reduce the tax burden on profitable companies so much that they would end up receiving tax refunds, a prospect Snow said would have to be avoided.
But lobbyists, economic advisers and congressional aides say it is only natural to look at incremental options. At this point, the Treasury Department appears ill-equipped for any dramatic rethinking. The job of assistant Treasury secretary for tax policy -- the Treasury's top tax position -- has been vacant since Olson announced her resignation a year ago. Gregory F. Jenner -- Olson's deputy, who had taken her post on an acting basis -- quit this month. Treasury officials gave Eric Solomon, who is deputy assistant secretary for regulatory affairs, the additional assignment of acting deputy assistant secretary for tax policy. But the top tax policy spot remains empty.
The formulation of a whole new tax code has been made all the more difficult by Bush's simultaneous pledges to overhaul Social Security and cut the budget deficit, and the conditions he has already put on changing the tax code.
"The presumption is that revolutionary changes in the tax code are likely not an option now given the budget deficit and given the challenges of doing this in addition to Social Security," said Dan Danner, senior vice president for public policy at the National Federation of Independent Business, the small-business lobby. "The presumption of most of the people on the outside is the most likely outcome is incrementalism."
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