October 19, 2005

Dear Tax Reform Committee,

I just read the Orange County Register article (in California) outlining
your proposed tax reforms. While I am encouraged by this fresh look at
the tax code, I saw some things in the proposal that I feel are good and
others that are not good. Perhaps you can consider my thoughts as you
refine the proposal by your Nov 1 deadline.

**[Mortgage interest deduction:]{.underline}**

I feel the proposed change is both a good and bad thing.

Good: Philosophically, awarding individuals for going into debt has
never been logical or healthy in my mind, but became the game we all
played. Therefore, reducing the interest deduction will be good in the
long term to reverse that illogical behavior and 'debt is good'
mentality.

Bad: The proposed change will hit those whose budgets depended on the
current tax benefit rather hard, especially in California. Housing is
more expensive here, and therefore eliminating the current tax benefit
will likely lead to many folks no longer able to afford paying the
mortgage on the home they bought. But because it reverses the illogical
\'house debt is good\' philosophy, **I would strongly encourage that
this somehow be a phased transition rather than a sudden burden,
allowing individuals some years to adjust.**

Bad #2: I read that the proposal will convert mortgage interest into a
credit rather than an itemized deduction. This will cause me as a
Californian to be doubly hit by taxes: First by the reduced federal
benefit, and second, since the deduction is no longer part of the
itemized deduction worksheet, it \"increases\" my taxable income in
California, and my California tax goes up substantially as well.
**Please reconsider keeping the mort interest as an itemized deduction
rather than a credit.**

Here's how this will play out for me so you can understand the burden,
even on folks who tried to reject the "house debt is good" philosophy.
In my case, we have a \$400,000 15-year mortgage on a home presently
valued at 1.6 million (we bought 10 yrs ago for 600,000). We have 12
years and about 350,000 left on the mortgage. We have resisted the
equity-cash-out refinancing that many others have done because we do not
believe any debt is good and are determined to enter retirement debt
free.

Last year our mortgage interest was about \$20,000. The tax benefit of
this is 33% federal and 9.3% state, or \$8460. Under the new proposal,
only \$312,000 of \$400,000 of the original mortgage will be considered.
I.e.: \$15,600 instead of \$20,000. Then because it's a credit rather
than an itemized deduction, there is no California tax benefit but only
a 15% federal "credit". Out tax benefit is reduced by \$6,120 to
\$2,340! Ouch! Over \$500 a month defiantly will impact our budget! Now
double or triple this impact for the typical Californian who bought more
recently and therefore has a higher and longer term mortgage! With that
amount of budget impact, its time to sell the house (at a loss due to
plummeting housing values) and revert to renting! This does not support
the committee's goal of supporting home ownership, but with my two
suggestions above, (transition plan and keep as an itemized deduction),
that goal could potentially be retained.

**[AMT elimination:]{.underline}**

Hurrah! I am increasingly frustrated to loose my high state taxes as a
deduction... And because I don't carry high mortgage debt, AMT further
punished me...Last year I paid about \$3000 in AMT. I just wish my
potential \$3000 gain on AMT reduction were at least close to my \$6120
loss due to the mort interest change... In the end I stand to lose by
paying \$3100 more in taxes, not less.

Other proposed changes I see as good, but cannot quantify due to lack of
detail provided in the article:

-   Complete elimination of the marriage penalty. This has simply never
    been fair to dual income earner families... Because of the marriage
    penalty and the phased-out benefits, our family is currently paying
    about 8% more in taxes than we would otherwise. I.e.: \>50% tax not
    including Social security and medicare. This is what some would call
    slavery, so I look forward to a lighter 'sentence'. But what else
    are you proposing in terms of phase-out changes other than the
    marriage penalty elimination?

-   Tax credit for charitable donations \> 1% of income. Its wonderful
    to encourage charitable giving.

-   Investment Income Changes: it has been frustrating to savers to save
    only to have the government take so much of the gains and interest
    away. The games some people play to retain a little bit of their
    gains (family shifts, etc.) take a great deal of accounting effort.
    These 3 items will take a good step forward in rewarding rather than
    punishing savers, and keeping folks from having to play silly games
    with their accounting.

    -   Investment income plan to eliminate dividend taxes and exclude
        75% of stock capital gains

    -   Alternative investment income plan to eliminate investment
        income at 15%, assuming this means bond interest income too,
        right? (not just capital gains)

    -   Increase the home sales exclusion to 600,000 vs 500,000 and grow
        over the years for inflation -- wonderful. However I felt only
        the real estate agents and real-estate investors benefited from
        the change that got us to the 500,000 exclusion vs the
        old-roll-forward gains from the previous house rules. Homeowners
        who live in one home for many years and contribute their time
        and effort to be part of the community are punished by that
        change a few years ago because they exceed the exclusion amount
        if and when they must move. The only option becomes to never
        sell your house (if that can be avoided) or become a real-estate
        investor and constantly turn your house. Therefore I would
        alternatively welcome a reversion of the old rule if possible.

Proposed change I see as bad:

-   Employer provided health insurance: This will discourage companies
    from offering decent health insurance and put even more of the
    burden on the individuals. This leads to fewer folks having health
    insurance and more welfare expenditures... If it goes the way of
    taxing life insurance benefits from work, this will not be good
    either. For example, I found that the group life insurance I pay for
    through my company (note, not my company paying for it) costs me
    considerably more than an independent policy. First because
    insurance companies charge higher rates for these 'group plans' and
    second because the imputed tax is out of norm from actual insurance
    rates. I currently pay through my employer \$814/year for life
    insurance, but the imputed tax reported is \$1340/year, costing me
    an additional \$586/year in life insurance cost. Quotes from
    independent insurers for the same policy amount are just \$282/year,
    or over \$1100 less per year. I visualize this sneaky type of
    inflated costs applied to 'group' health plans that unsuspecting
    individuals buy through their employer.

Other proposed changes I don't understand and look for more clarity from
you on or before Nov 1:

-   4 rather than 6 tax rates? A top rate of 33 sounds good although it
    doesn't help me much, but does everyone benefit or do some folks pay
    more, others less?

-   single family credit?

-   work credit?

-   Save at work: (how is this different from 401k?)

-   Save for retirement: will I be unable to contribute due to income
    limits just as Roth IRAs aren't available to me today?

-   Save for family: does this mean up to \$10000 a year of education,
    medical and home buying expenses is not taxed, with no income
    limits? Do annually unused expenses disappear like flex account
    today, or do they roll into the next year?

Any thought of changing the tax on retirement savings withdrawals in
retirement? Taxing as regular earned income is a punishment to the
savers, contrary to your goal to encourage savings.

Thanks for allowing me to submit my feedback.

Anita Richards

Anita.richards@ncr.com