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So much for tax reform

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February 7, 2006

By MARY DEIBEL

President Bush wants Congress to make his tax cuts permanent law and to sweeten tax breaks for Health Savings Accounts.

Otherwise, his new budget puts off tax reform even though he campaigned for re-election on streamlining “the mess of a tax code” and despite recommendations of his bipartisan White House task force. Treasury Secretary John Snow, who is charged with sorting through its options, says, “We’re not going to put a timetable on this thing.”

As for private Social Security accounts that were last year’s centerpiece, reform is relegated again to a bipartisan commission, the third to study changes the last 10 years.

The tax package _ part of the $2.77-trillion 2007 budget blueprint _ would cost Treasury $1.7 trillion in foregone revenues the next decade at a time when it needs Congress to raise the limit on the national debt again, this time to more than $9 trillion.

Key tax proposals call for permanent extension of lower income-tax rates, marriage penalty relief, $1,000-a-child tax credits and full repeal of the federal estate taxes that were part of the 2001 Bush tax cut bill. All are slated to expire after 2010, but for 2011 alone, continuing the cuts would lose $120 billion in revenue.

Other provisions call for permanently taxing stock dividends and capital gains on profits from selling stocks, bonds and other assets at a maximum rate of 15 percent, both changes enacted in 2003 and slated to expire after 2008.

The House voted late last year to extend the 15 percent maximum capital gains and dividend rates another two years.

But the Senate refuses to go along in its version of a $70-billion tax-cut package, voting last week to fix the Alternative Minimum Tax instead for 2006 by exempting $62,550 for joint filers and $42,500 for other taxpayers to ensure that no more taxpayers owe this parallel income tax than owed it for 2005.

Enacted in 1969 as a tax to make the truly rich pay at least a little, the Alternative Minimum Tax has never been adjusted for inflation so that it now threatens to hit one in three taxpayers, denying many popular deductions to people making less than $45,000. Some 5.5 million households will owe it for 2005 when taxes are due in April, but 26 million will owe it for 2006 absent a fix, according to new Treasury estimates.

The president’s budget would patch the Alternative Minimum Tax this year, but banks on no fix thereafter and actually counts on the $1.3 trillion it stands to bring in the next decade to cut future deficits and the debt.

Another $156 billion in tax breaks over the decade would go to Bush health-care tax breaks designed to expand the 3 million taxpayers who have opened Health Savings Accounts since their enactment in 2003 to more than 20 million by 2010.

The accounts, which still would be small compared to the 195 million Americans who get health insurance through work, already let individuals spend tax-free money for medical needs if they buy high-deductible health insurance policies.

New administration sweeteners include tax deductions and credits for payroll and income taxes on health care premiums that Health Savings Account owners would otherwise pay so they would be on a par with untaxed coverage employers provide employees. Lower-income workers also would qualify for tax credits equal to 90 percent of their insurance premium up to $1,000 a person, or $3,000 for families.

Bush says that Health Savings Accounts and high-deductible insurance coverage will “instill a stronger element of cost consciousness among health care purchasers, thereby working to slow the rise in health-care inflation for all Americans.”

But the accounts have drawn mixed reviews from users, many of whom put off preventive care to cut out-of-pocket expenses.

Critics such as Ron Pollack, head of FamiliesUSA, an advocacy group, say they do little or nothing to contain health care costs or enroll 43 million uninsured Americans.

“I’m glad (the president) is making the health affordability crisis a priority,” says Pollack. “But this proposal, unfortunately, will make the affordability crisis worse.”

The Kaiser Family Foundation, a non-partisan think tank, recently reported that health premiums soared 73 percent the last five years, 2.5 times the inflation rate and more than triple worker pay.

Sweetened Health Savings Accounts also go the opposite direction of the president’s tax reform panel. It called for capping untaxed health insurance that taxpayers get through work at $5,000 or $11,500 for families, and for giving tax breaks equal to those limits to 43 uninsured million Americans if they buy policies on their own.