Plan slams state with $12 billion higher tax bill, opponents say

A tax panel's recommendation to scrap state and local tax deductions would wallop New Yorkers with an extra $12 billion tax bill and drive high earners out of state, officials said Tuesday. President Bush's advisory tax panel offering of a drastically simplified income tax system _ one that would no longer allow taxpayers to deduct what they pay in state and local taxes _ was quickly denounced by Sen. Charles Schumer, D-N.Y.

"It is a dagger to the heart of the people on New York," said Schumer, who sits on the Senate Finance Committee and vowed to beat back the "pernicious proposal." Nationally, taxpayers would pay roughly the same amount of tax under the proposed system, and much of the paperwork would be eliminated. But those changes would vary from state to state. New York, which has a relatively high state and local tax burden, could end up paying some $12 billion more a year, Schumer said. Robert Ward of the New York state Business Council said many of New York's big earners would move away if such a change did become law.

"It will drive successful New Yorkers away to lower-cost states, and that would be a bad thing for all New Yorkers," said Ward. "The rest of the country is tired of subsidizing New York's high taxes, and it's only a matter of time until something changes on that," he added. Panel member and former Internal Revenue Service commissioner Charles Rossotti said the proposal makes the tax process simpler for everyone.

"I don't think it's a small move in this direction, I think it's a huge move," said Rossotti. The White House made no commitment to stick to the panel's recommendation when forwarding its tax-simplification proposal to Congress, a move Bush spokesman Scott McClellan said is not expected before next year. "We're going to take into account all the work that they have done and the recommendations that they are making," McClellan said. "We share a common goal of reforming our tax code to make it simpler and fairer." The President's Advisory Panel on Federal Tax Reform is charged with making multiple recommendations for different tax methods that make income taxes a fairer, simpler and more economically productive system. Its final report is due Nov. 1.

The panel would shrink the number of income tax rates from six to four and put 75 percent of individuals and families in the bottom 15 percent tax bracket. The proposal abolishes the alternative minimum tax. The levy is designed to prevent the wealthy from evading taxes, but it is increasingly creeping into the middle class. Individuals would not pay tax on roughly three-quarters of the capital gains on corporate stock. Myriad personal and family tax breaks would be replaced with one family credit. Income tests designed to keep most current tax breaks within the middle class would be eliminated, letting wealthier individuals and families benefit.

Benefits and savings accounts for retirement, health and education would be eliminated in favor of three savings accounts, all funded with taxed income that would be allowed to grow and be withdrawn tax free. One account would let workers save for retirement through their employers. Taxpayers also could put $10,000 every year into each of two accounts, one for retirement and the other for health, education and home-buying expenses. Low-income taxpayers could get a savers credit worth up to $500.

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