With the 2008 presidential election looming, proposals that could turn the most sanguine tax accountants into habitual nailbiters came under serious discussion on both sides of Capitol Hill.In the Senate, congressional leaders called together a panel of top economists to help plot a course for tax reform next year, but the discussion produced more conflict than consensus.

Meanwhile, in the lower chamber, Democrats opened fire on one of the most cherished tax deductions of tax accountants and their clients: health savings accounts. During hearings before the House Ways and Means Health Subcommittee, Democrats unleashed a barrage of criticism at these accounts, which allow individuals and their employers to make tax-preferred contributions toward qualified medical expenses, provided that they have high-deductible health insurance plans.

HSA holders can contribute more to the account (up to a specified limit) than would be required to fulfill their annual deductible, and any unused portions accrues tax-free and can be withdrawn tax-free so long as the funds are used only for qualified medical expenses.

Officials at the House committee, however, were quick to point out that “unlike employer-provided flexible spending accounts, individuals are not required to prove or otherwise substantiate that their withdrawals are being used for health care purposes.”

Indeed, critics have suggested that HSAs may be routinely abused at the expense of other, lower-income taxpayers.

Witnesses voiced concerns of their own about HSAs.

Linda J. Blumberg, Ph.D, principal research associate for the Urban Institute, told Congress that HSAs “provide additional subsidies to the people most likely to purchase health insurance even in the absence of no subsidy at all — those with high incomes.”

Her conclusions were confirmed by Government Accountability Office health care director John Dicken, who released a report showing that taxpayers between the ages of 19 and 64 with HSAs in 2005 had average adjustable gross incomes of $139,000 — more than double the $57,000 AGI for other filers that year.

Meanwhile, on the other side of the Hill, some of the nation’s most respected economists were giving the Senate Finance Committee conflicting opinions on how to reform the nation’s income tax rules.

The one area of agreement: Congress needs to move sooner rather than later to address the problems facing American taxpayers, including the voracious Alternative Minimum Tax, the growing complexity of the Tax Code, and the imminent expiration of the 2003 Bush tax cuts.

If a Democrat is elected president this fall, those issues could become even more complicated, because it’s likely that the cost of a new national health care program would have to be factored into the equation, several witnesses warned.

For his part, Urban Institute Tax Policy Center director Dr. Leonard Berman proposed a hybrid federal consumption tax with elements designed to attract support from both political parties.

His plan would combine deep rate cuts for individuals and businesses, new curbs on spending for entitlement programs, a “vastly simplified and much flatter income tax” and a new national value-added tax that would be dedicated to pay for a new universal health insurance voucher. “With a new financing source for health care, income tax rates could be cut sharply — the top rates could be cut to 25 percent or less,” he told the Senate. “The health care voucher would also offset the inherent regressivity of a VAT,” and, “The simplified income tax would be designed so that most taxpayers would not have to file income tax returns.”

As an added sweetener, the plan would let Congress to eliminate the AMT altogether, as well as the Medicare payroll tax, Berman said. Although some have proposed far higher VAT rates, he maintained that a value-added tax of 15 percent would be sufficient under his plan.

Other economists, however, warned Congress that a European-style VAT or other consumption tax would be a disaster for the U.S. economy.

Dr. William Gale, vice president of Washington’s Brookings Institute, testified that moving to a VAT or other form of consumption tax would provide massive tax cuts for the wealthiest households and increase the tax burden on low- and middle-income households.

Gale also disputed estimates that the tax rates under these systems would be digestible for Americans. “In order to replace almost all existing federal taxes and maintain government programs, a national retail sales tax would require mark-ups at the cash register of more than 40 percent, not the 23 percent rate advertised by plan supporters,” he said.

Senate Finance Committee ranking Republican Charles Grassley, R-Iowa, urged the economists to continue bringing forth proposals to reform individual taxes, stressing that all suggestions will receive careful consideration. “I have no pre-conceived notion of which direction we should go,” Grassley said.

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