Tax Panel May Call For Reduction Of Mortgage And Healthcare Tax Breaks

by Leroy Baker, Tax-News.com, New York

13 October 2005

The Presidential Tax Advisory panel is likely to recommend curbing tax breaks on home ownership and employer-provided health insurance plans when it produces its final report, scheduled for November 1.

Following the panel's meeting on Tuesday, the first for three months, it emerged that the eleven members were in broad agreement that the total amount of mortgage debt for which interest is deductible should be reduced to a figure in the region of $300,000 to $350,000 from its current level of $1 million.

The panel has also indicated its preference for limiting tax deductions for employer healthcare plans by placing an $11,000 per year per employee cap on the amount of premiums that employers can deduct.

It is felt that both of these tax breaks in their current format tend to favour wealthier members of society to the detriment of the less well off, and would fulfil one of the panel's goals to make the tax system fairer for all taxpayers. Limiting mortgage interest deductions would also help to cool the country's housing market and enable more working class people to step onto the housing ladder. US house prices have risen 69% in eight years, boosted by tax breaks and low interest rates.

Limiting these tax breaks would also help absorb the cost of repealing or limiting the Alternative Minimum Tax, another issue upon which the panel has reached a consensus. This system was initially designed to ensure that the wealthy cannot get away with paying little or no tax, but it is now beginning to affect taxpayers in the middle income brackets. However, repealing the AMT comes with a hefty $1.2 trillion price tag over ten years.

It is now becoming apparent that the panel is moving further away from the idea of replacing the income tax system with a sales tax or value added tax system, citing concerns that poorer taxpayers will pay disproportionately more of their income in tax than the wealthy. Moreover, too many questions remain over how a sales tax system will be administered. It would however appear that the VAT option remains on the panel's list, as does the possibility of an income tax/VAT hybrid which is common in Europe, although panel chairman, the former Senator Connie Mack, indicated that the latter option could make the tax system more complex.

The panel is scheduled to meet again on October 18, with a possible last meeting penciled in for October 27 where members would attempt to resolve last minute details before they make their final recommendations on November 1.

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