Tax reform or impasse?

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President Bush says he wants to reform the tax system and has named a tax reform commission which is to issue a report in September. The report was originally due by July 31, but the White House asked for the delay so it would not interfere with Social Security reform, which needs a few more months before it can be declared legally dead.

When this whole effort started, I often said in columns and interviews that the White House made a very serious error in trying to do Social Security reform and tax reform at the same time. The issues were too big, I said, and the White House would be lucky to do one or the other. Trying to do both risked accomplishing neither. The delay in the tax reform report shows the White House has finally started to figure this out.

We still don't know what the commission will recommend. The assumption has been it would endorse one or more comprehensive reform options, such as the flat tax or national retail sales tax. But there are indications the commission report may be more targeted and less comprehensive.

The other week, the tax commission's co-chairmen, former Sens. Connie Mack, Florida Republican, and John Breaux, Louisiana Democrat, said abolishing the Alternative Minimum Tax would definitely be one of the recommendations to the Treasury Department. (Technically, the commission reports to the Treasury secretary, who will then decide what recommendations to forward to the president.)

The AMT unquestionably is a very bad part of the tax system and should be abolished. But making this isolated recommendation suggests the commission's report will be less comprehensive than previously thought. After all, if the commission were to recommend, say, a flat tax system, there would be no need to make abolishing the AMT a separate recommendation. It would be ended automatically.

Therefore, I think we be more likely to get a laundry list of specific recommendations for improving the tax system than a master plan for complete overhaul. But any number of previous reports already have detailed the tax system's specific failings from the standpoint of fairness, efficiency and administrability. They are all gathering dust on library shelves.

Also, trying to do tax reform this way means the commission must necessarily develop a list of tax increases to pay for the reforms. The commission has a mandate to make its recommendations "revenue-neutral." This means the package must raise the same revenue as projected under the current tax system -- no more, no less.

It is certain, therefore, that the vast bulk of public attention will be on the revenue raisers. For example, people already assume the AMT repeal will be paid for by abolishing the deduction for state and local taxes. Naturally, this has high-tax states like New York and California up in arms. In 1986, then-New York Gov. Mario Cuomo, a Democrat, virtually killed this idea single-handedly. This time it could be California Gov. Arnold Schwarzenegger, a Republican.

High-tax states like the federal deduction because it lowers their tax burden by the amount of one's federal tax bracket. If a taxpayer in the 33 percent federal tax bracket itemizes, this is like getting a one-third discount on state and local taxes. Eliminating the deduction would significantly increase many people's taxes even if they no longer had to pay the AMT.

In my opinion, these kinds of tradeoffs are politically impossible. People will fight much harder to keep a current tax benefit than potential beneficiaries will fight for a new one. Consequently, the only way you can even hope to eliminate "sacred cow" deductions like that for state and local taxes is a complete tax code overhaul. Attempts to reform incrementally, as it seems the tax commission suggests, are simply doomed to failure.

Unfortunately, President Bush has never articulated a tax reform vision, which explains why he supports a long list of new tax gimmicks -- I mean incentives -- for energy production and conservation. None of these belong in a properly designed tax system, from either a liberal or conservative point of view. They just clutter up the tax code and make reform all the more difficult, because you have created new constituencies in support of the status quo.

In his new book, "Flat Tax Revolution," magazine publisher Steve Forbes again explains the virtues of fundamental tax reform. I hope someone at the tax commission reads it.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.