3rd UPDATE: Obama Seeking Tax Changes To Fund Health Efforts

The White House on Monday proposed an additional $59 billion in changes to the tax code that would help pay for the cost of efforts to cover the more than 40 million Americans without health insurance, including a substantial tightening of estate and gift tax rules.

Other new revenue raisers would affect life insurance products, limit certain accounting methods, and bar the paper industry from reaping a tax credit for a recycled fuel known as "black liquor."

Budget documents released Monday reiterate U.S. President Barack Obama's plans to create a $630 billion "health reform reserve fund" to help pay for the health-care efforts, which are expected to cost at least $1.2 trillion over 10 years. Tax provisions in the plan should cover $325.6 billion of the reserve fund, with the rest coming from savings to the federal government's health-related costs.

The centerpiece of the tax proposals - a limit on charitable deductions for taxpayers in the top two income brackets - was rolled out earlier this year and remains in the proposal.

But the White House dropped its estimate of how much that proposal would raise, from $317.8 billion to $266.7 billion over 10 years. The charitable deductions proposal has drawn opposition from congressional Democrats.

On Monday, the White House added several other tax-generating proposals to supplement that plan, including proposed changes to estate and gift tax laws. The plan would require "consistent valuation (of property) for transfer and income tax purposes." According to the White House, the estate and gift tax provisions would raise $24.2 billion over 10 years.

Another proposal would end the paper industry's practice of combining liquid byproducts from the production of paper - or so-called "black liquor" - with diesel fuel to receive alternative fuel tax credits.

The alternative fuel mixture credit is slated to expire at the end of this year, and lawmakers, including Sen. Max Baucus, D-Mont., had vowed to shut down paper companies' use of the credit either by not renewing the credit with respect to "black liquor" or passing legislation earlier to block it.

The White House is proposing to deny paper companies access to the credit immediately when legislation to block the tax benefit is signed by the president.

The budget also seeks to take away some tax breaks for the life insurance industry, raising $12.7 billion over 10 years, according to the White House estimate.

Life insurers follow special rules when determining how much to deduct for dividends received on investments in common stock. The White House is proposing to further restrict those deductions.

According to a life insurance industry official, that proposal would fall hardest on insurers that write more policies with stock-based investments - including the Hartford Financial Services Group Inc. (HIG), Manulife Financial Corp.'s (MFC) John Hancock Financial and Lincoln National Corp. (LNC).

In addition, the Obama administration wants to disallow some interest expense related to life insurance companies take out on "key personnel," which under current rules may be deducted.

Frank Keating, president and chief executive of the American Council of Life Insurers, blasted the proposal, saying: "This is absolutely the wrong time to make it more expensive for families to obtain the security and peace of mind our products provide."

Another proposal in the bill seeks to improve the enforcement of current tax laws, including a requirement that some business file their tax returns electronically. The White House would seek greater penalties for companies required to file electronically that did not do so.

The tax enforcement changes would raise an estimated $10.4 billion over 10 years.

The administration in February outlined other provisions that would raise revenues for the health reserve fund, but through changes to Medicare payments.

The most significant Medicare provision would put in place vast reductions in payments to private insurers through the Medicare Advantage program, creating a competitive bidding system to make Medicare Advantage payments more comparable to payments through the government's traditional Medicare fee-for-service program. That provision is slated to save $175 billion over 10 years.

-By Patrick Yoest and Martin Vaughan, Dow Jones Newswires; 202-862-3554; [e-mail]