On November 1, the President's Advisory Panel on Tax Reform submitted its report to Treasury Secretary John Snow recommending ways to make the tax code simpler, fairer, and more pro-growth. The panel has been working on these recommendations since January, when President Bush issued an executive order establishing it. Its long-awaited recommendations turned out not to be the rubber stamp for conservative regressive tax policies many observers expected, but instead represent a mix of ideas that confront the difficulty of enacting tax reform, not only in a harshly divided political environment, but also with a deeply unhealthy federal budget. Despite recommendations avoiding blatantly regressive proposals, such as those advocated by many anti-tax groups, the panel's work should not be blindly accepted. The proposals, overall, continue the trend toward lower revenues and instituting massive structural deficits, while maintaining a steady, albeit slight shift in the tax burden away from the wealthy and toward working families. Perhaps most importantly, because the proposal are only the initial recommendations for Secretary Snow and not the final package, it is highly likely many of the recommendations will be cherry-picked, modified, or outright rejected by an administration which has not demonstrated a previous commitment to pursuing a tax code that is either fair or progressive. After holding 12 public meetings over a span of nine months, the panel outlined a number of themes reoccurred within public comments and testimony. From these themes, the panel developed two separate proposals, the Simplified Income Tax Plan (SITP), which according to panel members "dramatically simplifies our tax code," and the Growth and Investment Tax Plan (GITP), which moves "the tax code closer to a system that would not tax families or businesses on their savings or investments." Despite the panel's claims, both plans would vastly favor savings and investment, thereby giving preference to high-income, wealthy Americans over those with less disposable income to invest in the stock market or retirement, health care, or education savings plans. The two plans have many common features:

• Simplify the tax system and streamline tax filing for families and businesses;
• Lower tax rates on families and businesses;
• Extend tax benefits for home ownership and charitable giving to all taxpayers, not just the 35 percent who itemize;
• Extend tax-free health insurance to all taxpayers, not just those who receive insurance from employers;
• Remove impediments to saving and investing; and
• Eliminate the Alternative Minimum Tax (AMT), of which full repeal is estimated to cost a staggering $1.3 trillion over a 10-year period.

Two Plans Handle Exemptions, Credits, and Deductions in Similar Ways Under both of these plans, the personal exemption, standard deduction, child tax credit, and Additional Child Credit would be consolidated into a "family credit" that would increase with the number dependents claimed. The earned income tax credit (EITC) would be transformed into a "work credit" with a maximum of $5,800 for families with more than one child. Besides simplifying taxes for working Americans, this consolidation would eliminate marriage penalties since the credits could be claimed regardless of the taxpayer's marital status. In addition to these consolidations, the panel proposed to cap or end a number of popular deductions in order to pay for the repeal of the Alternative Minimum Tax. The first and most controversial recommendation involves capping the home mortgage interest deduction at 15 percent of mortgage interest paid. While this deduction would be available to all taxpayers, it would be limited to an amount based on the average regional price of housing, currently between $227,000 and $412,000. Housing developers and realtor associations have been at the forefront of opposition to the proposed cap. Also of note is the panel’s recommendation to replace the tax-free status currently enjoyed by the self-employed and employers who pay health insurance premiums with a system that allows all taxpayers to use pre-tax dollars to purchase health insurance up to the amount of the average premium. The average premiums are currently estimated at $5,000 for individuals and $11,500 for families. Finally, the panel would end the deductibility of state and local taxes, a provision opposed by many from states with high state and/or local income and sales taxes. Differences Between Plans While the two plans largely treat reform of personal income tax similarly, they differ substantially in their taxation of business and capital income. Under the GITP, companies would be allowed to immediately write off the cost of all capital investment, but they would lose the ability to deduct interest costs on the money they borrow. Under the SITP, companies could keep their valuable interest deduction, but would have to write off the costs of facilities and equipment over time, as is currently the case. Additionally, the SITP would:

• Establish four income tax brackets at 15, 25, 30 and 33 percent;
• Exclude 100 percent of dividends and 75 percent of capital gains from any tax, and tax long-term capital gains at rates ranging from 3.75 percent to 8.25 percent;
• Tax small business income at rates equal to individual income tax rates, and large business income at a 31.5 percent rate.

The GITP would:

• Establish three income tax brackets at 15, 25, and 35 percent;
• Tax all dividends, capital gains and interest at a 15 percent rate;
• Tax sole proprietor businesses at individual rates, and tax other types of small businesses at 30 percent. Large businesses would be taxed at 30 percent, although all new investment would be expensed, and -- except for financial institutions -- interest paid would not be deductible and interest received would not be taxable.

Reactions Mixed, Urge Cautious Approach Reaction to the panel's recommendations has been mixed so far. Many analysts, experts, and observers have praised certain aspects of the proposals and commended the panel for developing reform plans that are realistic in light of the currently unfriendly political and fiscal environments. Overall, however, reactions have urged caution in evaluating the panel's recommendations until after Snow develops his own proposal to give to the president, with many speculating that Snow's proposals will be drastically different than those of the panel. White House Press Secretary Scott McClellan commended the tax reform panel for completing its work. He did not, however, offer a specific timetable for the unveiling of the president's tax proposals, saying President Bush would "make decisions in due course." Snow, for his part, told reporters that the tax panel’s report would serve as a "starting place" for his own recommendations. He is expect by the end of the year to offer recommendations to the president, which Bush then may use in his January 2006 State of the Union Address. Yet, as was the case with reactions from many analysts and insiders, who separated the proposals into sections, showering praise on some while criticized others, Secretary Snow may pick and choose only those recommendations of the panel that he finds suitable as he develop his own recommendations for President Bush. Unfortunately, for both proponents of the panel's recommendations and those favoring a broad approach to tax reform, what comes out of Treasury will likely be markedly different than the panel's recommendations. Instead, the administration is expected to keep the recommendations it wants to pursue and leave out those recommendations that do not fit its economic agenda. In particular, the White House plan will likely include the more popular tax breaks and leave out the tax hikes that are necessary to pay for them. As the Center for American Progress states, "It is likely that the final report and the panel’s recommendations will be cherry-picked by the Bush administration to fit its prior ideological agenda." The prospect of administration cherry-picking, however, is hardly a surprise. Senate Finance Committee Chairman Charles Grassley (R-IA) noted that the proposals, while potentially serving as a good starting point are "bound to be politically unpopular." He pointed in particular to the reduction in the home mortgage interest deduction, which he believes the White House will not support. On the other side of the aisle, Senate Finance Committee member John Kerry (D-MA) labeled the advisory panel "doomed" from the start thanks to Bush's insistence on making permanent $1.3 trillion in tax cuts "skewed to the wealthiest Americans." Democratic counsel for the House Ways and Means Committee, John Buckley, predicted that the panel's recommendations have little chance of being enacted as a whole but said the process is far from over. While neither plan is likely to pass in its current form, Buckley believes the package under construction at the Treasury Department will be taken seriously by Congress. Rep. Charles Rangel (D-NY), ranking member on the Ways and Means Committee, issued a statement on the recommendations criticizing them as "unfair and unwise." He also discussed the elimination of deductions important to the middle class, but pointed out that tax cuts for the very rich are not only being preserved, but increased. House Minority Whip Steny Hoyer (D-MD) also criticized the panel's recommendations for increasing the burden on the middle class while doing nothing to address the structural federal budget deficit. The tax panel likely avoided the messy business of structural deficits, because addressing them would mean rolling back some of the president's first-term tax cuts. Even though the president instructed the panel to make "revenue-neutral" recommendations, the panel was supposed to assume the Bush tax changes would be extended beyond their current expiration dates, thus locking in inadequately low revenue levels and continuing structural deficits. The panel's attempt at "revenue neutrality" is thus misleading, as it started from a point of drastically insufficient federal revenues. Given the current federal budget morass, it would seem that responsible tax reform would comprehensively address the nation's current deficit, not simply achieving a phony revenue neutrality, but actually increasing revenue levels while maintaining a progressive structure. Such reform could realistically close the deficit in an equitable way, and the creation of such policies is certainly possible. The recommendation of the tax panel, however, do not come close to addressing broader budget concerns in any meaningful way. Unfortunately, even if the panel had addressed those concerns, its recommendations would be certain to encounter widespread opposition from the Bush administration and Congressional leadership, both of which have vowed not to raise taxes regardless of the consequences. As we have seen this year, those consequences include spending cuts for services on which millions of Americans depend.