Dramatic tax changes?

WASHINGTON — A presidential panel on Tuesday proposed a dramatic reshaping of the nation's income tax system that would limit or eliminate almost all existing tax deductions — including those for state and local income and property taxes — but greatly simplify filing.

The plan faces an uphill battle to become law, even though it addresses the highly unpopular complexity of the current system. It was immediately criticized by both Democrats and conservative Republicans, and would have to withstand fierce lobbying by interests that stand to lose lucrative tax breaks.

The panel, all of whose members were appointed by President Bush, wants lawmakers to eliminate federal deductions for state and local taxes and convert the popular mortgage deduction to a tax credit worth 15 percent of the interest paid on the average federally backed mortgage — no more than $312,000 at present. Taxpayers who live in areas with expensive houses and high taxes would be hit hard.

But the panel also wants to create new tax credits and abolish the unpopular alternative minimum tax, which is hitting a growing number of middle-class households. In the end, the great majority of Americans would get fewer deductions, but pay no more in taxes, panel members said.

"The bottom line: taxpayers will pay about the same," said Charles Rossotti, a panel member and former Internal Revenue Service commissioner.

The White House made no commitment to stick to the panel's recommendation when forwarding its tax-simplification proposal to Congress, a move that White House spokesman Scott McClellan said is not expected before next year.

At its final meeting before reporting to Bush on Nov. 1, the panel endorsed two approaches for simplifying taxes.

Its preferred plan calls for keeping the current system, while reducing the number of deductions.

A more sweeping alternative would set four tax rates on wages for individuals — 15, 25, 30 and 35 percent — and tax most investment income at 15 percent.

Rossotti, saying the panel's preferred plan would do much to simplify taxes, said, "I don't think it's a small move in this direction; I think it's a huge move."