May 4 (Bloomberg) -- President George W. Bush's Social Security plan is in danger of sinking from a heavy load of contention. House Ways and Means Committee Chairman Bill Thomas wants to rescue it by loading on even more controversy.

Thomas is considering a broader legislative package that includes new savings incentives and long-term health-care benefits. The plan, according to people who have discussed it with Thomas in recent days, could be financed by replacing at least part of the Social Security payroll tax with some form of consumption tax.

The California Republican, who has outlined his thinking to key economic and political experts in recent weeks, is skeptical of Bush's proposal to divert some payroll taxes to personal accounts invested in stocks and bonds. Democrats have insisted the accounts must be taken off the table before they'll even consider compromising.

``A consumption tax could conceivably have legs,'' said Representative Phil English, a Pennsylvania Republican and member of the Ways and Means Committee who is close to Thomas.

The panel will hold hearings next week that will ``break the mold'' on Social Security and retirement savings, English said, declining to discuss specifics. Sources close to Thomas stress that any plan is fluid.

Some Democrats said they suspect Thomas intends to create a new playing field. ``Bill Thomas doesn't talk to me, but if you read between the lines he's probably going to come up with something out of left field on Social Security and retirement security,'' said Representative Rahm Emanuel, an Illinois Democrat on the Ways and Means Committee.

Representative Sander Levin of Michigan, the senior Democrat on the House Social Security subcommittee, said many Democrats oppose the consumption tax in part because it would be in addition to current state sales taxes. Thomas ``knows our resistance to it,'' he said.

Gamble

Thomas's plan may also include lifting contribution limits on retirement savings to offset Social Security benefit cuts for middle- and upper-income taxpayers, Representative Jim McCrery of Louisiana, the chairman of the Social Security subcommittee and an ally of Thomas, said April 29. Representative Mark Foley, a Florida Republican on the Ways and Means Committee, said Republicans are discussing raising the caps on 401(k)s and Individual Retirement Accounts, or IRAs.

The strategy is a gamble that could draw in Democrats, who are unified in their opposition to the accounts, according to analysts. It could also backfire by deepening the public's skepticism about Bush's handling of Social Security and hurting Republicans in next year's mid-term elections.

White House Cooperation

``Broadening out the debate could cause more problems by adding more things that people dislike,'' said Maya MacGuineas, director of the fiscal policy program at the New America Foundation, an independent research group in Washington. ``But it might be necessary to get more people to the table.''

The White House press secretary, Scott McClellan, declined to comment on a possible tax proposal from Thomas. ``We appreciate Chairman Thomas's leadership and his commitment to move forward on legislation that will strengthen Social Security and get something done this year,'' McClellan said. ``We will continue working very closely with him as we move forward.''

Thomas signaled as early as December that he wanted to combine Social Security and tax-code revision. He reiterated that intention in an April 29 news conference, stressing the need for a ``complete retirement package'' focused on ``pensions, retirement instruments and the tax code itself.'' He told CNN yesterday that making Social Security solvent would require ``a number of adjustments.''

Shortfall

Social Security trustees forecast the system will begin paying out more than it receives in payroll taxes in 2017 and exhaust its surplus in 2041. At that point, the system would be able to pay 74 percent of scheduled benefits from tax collections.

Thomas has also mentioned the need to address health-care costs for seniors as part of any package. He hasn't provided specifics, though options may include tax breaks.

Christin Baker, a Thomas spokeswoman, declined to comment yesterday on which provisions he favors. ``We're in a stage of considering legislative options,'' she said.

Thomas decided to enter the fray after Bush's private accounts plan failed to catch on with either the public or Congress. Despite the president's 60-day, 60-stop campaign tour to promote his plan, polls show declining public support, Democrats remain united in opposition and a few Republicans, such as Senators Olympia Snowe and Susan Collins of Maine, and Lincoln Chafee of Rhode Island have expressed concern.

`Progressive Indexing'

Last week, Bush outlined a proposal known as ``progressive indexing'' to ensure Social Security's solvency by cutting benefits for middle- and upper-income taxpayers. This, too, failed to generate public support.

``The means-testing idea that popped up is landing kind of flat,'' said Representative Clay Shaw, a Florida Republican.

Thomas's proposal may change the dynamic, said Mark Weinberger, a vice chairman of Ernst & Young LLP and the Treasury Department's top tax official under Bush from 2001 to 2002. ``By expanding the debate to deal with additional funding for Social Security, he's trying to bring some Democrats to the table,'' Weinberger said.

``Thomas is one of the smartest legislative operators and will have as good a chance as anyone to identify the issues and get the votes to move something forward in the House,'' he said.

Historical Comparison

Thomas allies cite one precedent that could be instructive. In 1986, with President Ronald Reagan's tax reform plan bogged down in the Senate, Finance Committee Chairman Bob Packwood offered a dramatic reduction of tax rates and major closing of loopholes that paved the way for passage.

The strategy also carries significant political risks -- as Al Ullman, then Ways and Means chairman, found out in 1979. The Oregon representative called for a 10 percent value-added tax to cut the deficit and replace the corporate income tax. The proposal failed, and a voter backlash led to Ullman's defeat the following year.

AARP, the nation's biggest advocacy group for seniors, expressed concerns about any consumption tax, though officials said they would need details.

The proposal may create an unfair tax structure for Americans age 65 and older, said David Certner, AARP director of federal affairs. The majority don't pay any income tax because their incomes aren't high enough, he said.

``They spent their whole lives paying tax on the income that they earned, and now that they're spending it, they're shifting the tax to what they spend,'' he said. ``They're caught in a very bad way.''

AARP has been crucial in helping to turn public opinion against Bush's accounts proposal through print and television ads as well as town halls meetings across the nation.

Administration Support

A shift to a consumption tax has significant support in academic and political circles. In March, Federal Reserve Chairman Alan Greenspan told a presidential advisory panel that combining the U.S. income tax with a consumption tax would boost savings and make more capital available to fuel growth. A consumption tax would ``be best from the perspective of promoting economic growth,'' Greenspan said. Thomas, sources said, has discussed his plan with Greenspan.

Former Senators John Breaux and Connie Mack, the bipartisan co-chairmen of the Bush tax panel to propose changes to the tax code, said they are also interested in the some form of consumption tax.

Splits in Business Community

A consumption tax would likely split the business community, a key Republican constituency.

Retail companies such as Wal-Mart Stores Inc. could be expected to oppose such a tax. Other companies that don't focus on retail may welcome it as a respite from the 6.2 percent tax on employees' earnings they must pay under the current system.

Chief executives of U.S. retailers met last June with White House Chief of Staff Andrew Card, telling him a consumption tax ``was absolutely not an acceptable solution and we'd do everything we could to stop it,'' said J. Craig Shearman, spokesman for the National Retail Federation in Washington. ``We're certainly concerned about the momentum it has gained in the past year.''

The retailers left the meeting confident that a national sales tax was not under consideration by the administration, Shearman said.

To contact the reporters on this story: Heidi Przybyla in Boston hprzybyla@bloomberg.net; Jeff Bliss in Washington at 1975 or jbliss@bloomberg.net

Last Updated: May 4, 2005 00:14 EDT