Archive for Monday, April 25, 2005

Commission warns of too many tax breaks

April 25, 2005


— As taxpayers recover from finishing their annual filing chores, a presidential commission studying the tax laws has reached the conclusion that there are just too many deductions and credits.

To help taxpayers deal with college costs there are -- depending on which applies to a particular individual -- two different kinds of tax credits, a deduction for student loan interest and special tax-advantaged savings plans. Dozens of other tax benefits help families raise children and save for retirement, encourage adoption and push businesses to invest in new equipment.

"We have lost sight of the fact that the fundamental purpose of our tax system is to raise revenues to fund government," according to the Advisory Panel on Federal Tax Reform.

The commission's chairman, former Florida Sen. Connie Mack, said its nine members had been surprised at the number of tax deductions and credits.

"It wasn't until we really had the opportunity to listen to so many different people talk about so many different aspects of the code that it really sunk in about how much and how often the code is being used these days to either create incentives or disincentives for either investment or behavior," Mack said.

The White House budget office ranks the cost of a deduction for businesses that provide health insurance to employees as the top tax break, worth $126 billion next year. This tax break is growing faster than almost all other domestic programs.

Tax benefits that provide indirect subsidies to homeowners add up to more than the entire budget of the Housing and Urban Development Department. The earned income tax credit for low wage workers is bigger than any welfare program, including food stamps.

The list also includes many tiny tax breaks. Among them are ones that encourage biodiesel fuel, make interest on educational bonds tax-free and allow teachers to deduct the cost of school supplies.

A look at how much some benefits could reduce taxes for eligible taxpayers next year:¢ Mortgage interest deduction, $76 billion.¢ Capital gains tax break for home sales, $36.3 billion.¢ State and local property tax deduction, $14.8 billion.¢ Medical expense deduction, $9.1 billion.¢ HOPE education tax credit, $3.2 billion.¢ Student loan interest deduction, $800 million.¢ Adoption credit, $540 million.

The problem comes when taxpayers try to decipher the rules that govern those credits and deductions. The tax breaks typically come with pages of instructions and qualifications.

"It was clearly stated that the level of complication has become so great that in many cases it ends up deterring the activity that you're trying to encourage," Mack said.

But taxpayers are unlikely to give up some deductions to make the system simpler.

"Anytime you've got a benefit, wherever it happens to be, whether it's spending or taxes, people don't want to give them up," Mack said.

This summer, the panel plans to recommend ways to make the tax laws simpler and fairer.

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