The Bush administration budget for fiscal year 2006 would make permanent the tax cuts passed in 2001 and 2003, close loopholes, and consolidate the many existing retirement plans into one, but it would leave fixing the alternative minimum tax to be considered by the tax reform panel named in January.The proposed budget includes a refundable income tax credit for the cost of health insurance purchased by individuals under age 65, and an additional $500 million for Internal Revenue Service enforcement measures.

Other revenue provisions would:

* Permit tax-free withdrawals from IRAs for charitable contributions;

* Exclude from income the value of employer-provided computers and software to encourage telecommuting;

* Create a housing tax credit for developers of affordable single-family homes;

* Combat abusive foreign tax credit transactions;

* Implement IRS administrative reforms, including increasing the penalty for filing frivolous income tax returns from $500 to $5,000, consolidating the review of collection due-process cases in the U.S. Tax Court, and eliminating the monetary threshold for counsel review of offers in compromise; and,

* Permanently extend the research and experimentation tax credit.

For the first time since the Reagan administration, the budget calls for a decrease in non-security-related discretionary spending, furthering the administration goal of cutting the deficit in half by 2009.

"I appreciate President Bush's effort to cut the deficit," said Sen. Chuck Grassley, R-Iowa, chairman of the Committee on Finance. "We had annual increases in some government programs of as much as 15 percent during the Clinton years. The country can't sustain that kind of spending, and we need to continue ramping down annual increases in congressional appropriations."

The proposed budget "holds the growth of discretionary spending to just 2.1 percent, below the expected rate of inflation," Treasury Secretary John Snow told the Ways and Means Committee. "Non-discretionary spending in this budget falls by nearly 1 percent, the tightest such restraint proposed since the Reagan administration."

Snow acknowledged that, in the short run, tax cuts could have a negative impact on budgets and deficits. However, he said, growth, rather than higher taxes, is the answer.

"Treasury receipts are rising - in the second half of calendar 2004, individual income tax revenue is up 10.5 percent versus the same period in 2003 - and will continue to rise, as long as we have economic growth," Snow told the Senate Budget Committee.

"Let me be very clear on this: We have deficits and they are unwelcome," he said. "But we are not under-taxed and higher taxes will not be the solution to reducing deficits. Fiscal discipline, combined with economic growth, is the correct path."

'Belt-tightening' at the IRS

The budget calls for a 4.3 percent increase in the IRS budget, with a nearly 8 percent increase for enforcement.

IRS Commissioner Mark W. Everson indicated that the additional funding for enforcement would more than pay off in terms of increased revenue.

"Each year, the IRS collects $2 trillion, providing substantially all the revenues needed to run the government," said Everson. "The additional enforcement funding will be used to increase audits of corporations and high-income individuals, as well as expand collection and criminal investigation efforts. These investments will pay for themselves several times over."

However, he noted that the agency would have some "belt-tightening" to do in taxpayer services.

"We expect to make selected service cuts, including closing some taxpayer walk-in offices. These walk-in sites are relatively expensive, and the number of visitors has dropped as use of the IRS Web site has dramatically increased," he said.

Everson noted that the budget holds Business Systems Modernization funding at roughly the same level as last year. "The IT modernization program has had a number of successes in the past year, including the first update to the main IRS database in 40 years, the roll-out of new Internet services for taxpayers and practitioners, and improved administrative systems," he said. "The 2006 budget focuses resources on projects with direct impact on taxpayer service and enforcement efforts."

Mixed reviews

The budget cuts are modest by comparison to previous congressional budgets, according to the Lewisville, Tex.-based Institute for Policy Innovation.

"In recent years, the federal budget has grown at an unusually rapid pace, with domestic spending in President Bush's first term increasing at about 7 percent per year, or almost three times the rate of inflation," said IPI senior research fellow Peter Ferrara. "Given this recent spending build-up, there are now opportunities to reduce wasteful spending in virtually every agency of government."

Nevertheless, some observers say the proposed spending cuts are not enough.

"The administration is still not serious about cutting spending: Two of the five pages of the budget overview tout 37 new spending initiatives," said Chris Edwards, director of tax policy studies for the Cato Institute.

One reason the alternative minimum tax was left to the tax reform panel is because of its revenue-reducing effect, suggested Edwards. "Reform of the alternative minimum tax would greatly reduce revenue," he said. "In addition, the budget includes money for Iraq for this year but not for future years, so it has not included further costs which will almost certainly be needed."

"I don't think [Bush] will stand by his proposed limited cuts," Edwards added. "Last year, he promised the deficit would fall in half in five years, but this year it went up by $15 billion. I suspect that a year from now we'll see the deficit go up again - he keeps promising restraint in the future, but it never happens in the present."

Included in the budget call for permanent status for the tax cuts enacted in 2001 and 2003 is the repeal of the estate tax, which is currently set to expire for one year only, in 2010.

Estate and financial planning practitioners would take a particularly hard hit if repeal of the estate tax is made permanent after 2010, according to New York estate attorney Lawrence J. Peck.

"It's not a positive for anyone in the field, because some of the business will not be there anymore," he said. "On the other hand, it doesn't mean that everything will dry up. People will still need trusts to preserve assets and protect young children against their indiscretions. People will still die and there will still be a need for accounting and legal work in the administration of their estates."

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