Summary of the President's Tax Panel Recommendations

The President’s Advisory Panel on Federal Tax Reform submitted its report, Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, to Treasury Secretary John Snow on November 1, 2005. The report contains two options for overhauling the federal tax code for individuals and businesses, both of which were unanimously endorsed by the Panel members. The “Simplified Income Tax Plan” and the “Growth and Investment Tax Plan” have many similarities, especially in the recommendations affecting individual taxpayers; the biggest differences in the plans are in the treatment of businesses and capital.

Convened in January, the Panel worked for ten months under the leadership of its co-chairs former Senators Connie Mack (R-FL) and John Breaux (D-LA). The Panel held a number of public meetings and received input from many individuals and organizations including a letter (PDF) from Independent Sector. Several additional tax reform proposals such as a progressive consumption tax, a value-added tax, and a national retail sales tax were also considered and analyzed by the Panel, but were not recommended.

Overview of the Simplified Income Tax Plan and the Growth and Investment Tax Plan

In general the recommendations included in the Advisory Panel’s final report are intended to simplify the tax code and reduce paperwork and record keeping. The President instructed the Panel to make any recommended plans revenue neutral and the Panel states that these two options adhere to that stipulation. Both plans would reduce the number of tax brackets, lower rates, consolidate similar credits and deductions, increase personal exemptions, and eliminate the Alternative Minimum Tax (AMT). (For a detailed analysis of the Panel’s recommendations, see “President’s Tax Panel Recommends Two Options for Reform” by Washington Council Ernst & Young. (PDF)) Briefly, the major recommendations are:

• Reduce the number of tax brackets – There are currently 6 tax brackets for individuals. The Simplified Income Tax Plan would have only four brackets and the Growth and Investment Tax Plan would have three.

• Lower the rates – Under the Simplified Income Tax Plan the rates would be 10 percent, 25 percent, 30 percent and 33 percent. The three brackets in the Growth and Investment Tax Plan would be 15 percent, 25 percent and 30 percent.

• Consolidate and Increase the Personal Exemption – Both plans would consolidate the personal exemption, the standard deduction, the child care credit and the “head-of-household” filing status to create a new “family tax credit.” This new basic credit would be $1650 for single filers, $3300 for married filers, $2800 for single filers with dependent children, and $1150 for dependent taxpayers. On top of the basic credit, families would add $1500 for each dependent child and $500 for each other dependent.

• Replace the home mortgage deduction with a “Home Credit” – A tax credit of 15 percent of the interest paid on a mortgage for a primary residence would replace the current mortgage interest deduction. The Panel recommends that a “standard principle amount” be set for each region of the country based on a formula related to certain Federal Housing Administration (FHA) criteria. The 15 percent credit could not be applied to mortgage amounts above the regional “standard principle amount.” According to the report, the approximate standard principle amounts today would be between $227,147 and $411,704. The Home Credit would be allowed only for a principle residence. Vacation homes, second homes, investment properties would not qualify for the credit.

• Consolidate all higher education credits and deductions – A “family credit” allowance of $1500 would be available to all families with a full-time student age 20 or under.

• Consolidate work-related subsidies into a “Work Credit” – The Earned Income Tax Credit (EITC) and the refundable child care credit for low-income working families would become a single “work credit.”

• Repeal deduction for state and local taxes – The itemized deduction for state and local taxes would be eliminated.

Other important recommendations relate to the tax deductiblity of health insurance premiums for employers, employees and the self-employed. Specifically, health insurance premiums paid for by employers would be taxable to the extent that they exceed $5,000 per year for individuals and $11,500 per year for families. Other employee compensation benefits such as tuition assistance, child care benefits, life insurance and long-term care insurance would lose their current exclusion from taxable income and become “taxable compensation” for employees.

Three new savings plans and a refundable “savers credit” would replace a variety of current savings vehicles including IRAs, Roth IRAs, education savings plans, health savings accounts, and flexible savings accounts among others.

Recommended Changes in Charitable Giving Tax Laws

The Executive Order establishing the Advisory Panel stated that policy options should “…share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of home ownership and charity in American society [emphasis added]….” The Panel report acknowledges the critical importance of charitable giving as well as the role tax incentives play in encouraging charitable contributions. In the section “Improving Tax Benefits for Charitable Giving” it reads:

Americans by their nature are generous and have always supported charitable causes – not only as a regular routine of giving back to the community, but also in response to times of great need or natural disasters. This support is likely to continue, even if changes in law affect the tax benefits of giving. Research has shown, however, that taxpayers are sensitive to the tax rules on charitable giving…

The Tax Panel's report contains six recommended changes to the tax laws concerning charitable giving. They are:

1. Create a deduction for charitable contributions that exceed one percent of income. The deduction would be available to all taxpayers.

The Panel recommended the elimination of the distinction in the charitable deduction between itemizers and non-itemizers. This recommendation would extend the charitable deduction to all taxpayers. However, it would place a floor of one percent on the deduction. This means that only donations in excess of one percent of income would be deductible. While this is a gain for some non-itemizers who currently have no deduction, it will reduce by one percent the current deductibility of charitable gifts by itemizers.

2. Allow tax-free distributions from IRAs to be made directly to qualified charitable organizations.

This recommendation would allow taxpayers over age 65 to make charitable contributions directly from IRAs without adverse tax consequences. A similar provision is included in the CARE Act in both the House and the Senate and the free-standing IRA Charitable Rollover bills pending in both houses of Congress. Independent Sector and scores of other nonprofit organizations have endorsed the IRA rollover provisions in these bills. (See letter).

3. Require information reporting for large charitable contributions.

The Panel recommends requiring charities to report directly to the IRS and the donor all cash gifts of $600 or more. The Panel believes that direct reporting by the charity will improve the accuracy of deduction claims by providing the taxpayer with the correct amount of the gift and by giving the IRS a means of verifying the claim short of conducting an audit.

4. Allow taxpayers to sell property and donate the proceeds to charity.

This recommendation would permit taxpayers to sell property without having to recognize the gain and pay capital gains taxes if they donate the full sale amount to charity within 60 days of the sale. The same one percent floor would apply to these donations as to other cash donations. Sales would have to be arm’s-length transactions to an unrelated buyer.

5. Improve rules for valuing gifts of property to charities.

To improve the standards for valuing gifts of property to charities, the Panel makes three recommendations:

a) establish clearer standards for appraisals;
b) require appraisers to report the appraised value of the property to the donor, the IRS and the charity to which it is donated;
c) set new penalties for appraisers who misstate the value of the property.

For gifts of used clothing and household items, the Panel suggests ending the use of “do-it-yourself” receipts (receipts filled in by the donor) and allowing deductions for these items only when the taxpayer receives a price list and an itemized receipt from the charity.

6. Effective action should be taken to ensure better oversight and governance of exempt organizations.

The Panel “believes that it would be appropriate and desirable for lawmakers to review the types of organizations that qualify for tax-exempt status.” It offers the view that only organizations that “are truly serving the public interest” should be granted such status.

The Panel recommends that Congress review the standards for qualifying and maintaining status as a charitable organization. It makes no specific recommendations for changes, but urges Congress to provide better oversight and require better governance of exempt organizations.

Last Updated: November 7, 2005

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