Tax Reform Held Unlikely Until 1986 : Congress Sources Say Administration’s Own Delays Are to Blame

Despite President Reagan’s stated desire to win approval of a major tax reform package this year, sources on Capitol Hill say there is almost no chance that Congress could complete action on it until at least 1986.

Treasury Secretary James A. Baker III has promised to announce next month a new tax revision proposal, which Administration officials hope will mollify some of the critics of the original Treasury Department plan released last November.

President Reagan is expected to endorse the new version, which would eliminate many tax breaks in return for lower overall rates, and plans to campaign vigorously for tax reform after returning from the economic summit in early May in Bonn.

White House Hopes

But congressional sources say the Administration’s own delays have already undermined any White House hopes that its proposal could speed through Congress this year.

The House legislative counsel, Ward Hussey, whose office is responsible for drafting all bills into legal language, has privately told staff members of the tax-writing Ways and Means Committee that simply preparing a formal bill to deal with the complexity of the Treasury proposal could take almost a year under normal circumstances.

Working around the clock with teams of tax lawyers might cut that time to three months, one staff member said.

In addition, even though the chances for eventually completing a major overhaul of the tax system have improved dramatically since the original Treasury plan was disclosed, the lack of political consensus on many of the most controversial aspects of tax reform is all but certain to push the debate into 1986, an election year for every member of the House and one third of the Senate.

‘The Politics of Taxes’

“The Administration’s timetable simply ignores the realities up here,” John Sherman, a veteran Ways and Means Committee staff member, said. “Never mind the drafting problems--the politics of taxes are so complicated that the earliest it might move out of the House is the first of the year.”

And even if the House passed a bill by the beginning of 1986, it would then have to clear the Senate Finance Committee--where opposition to tax simplification is expected to be fierce--and be approved by the Senate before it could even reach the crucial point of bargaining in conference between tax writers of both houses of Congress.

“We’re in a kind of Catch-22. We have to move fast or the interest groups are going to really tear us apart on this,” Rep. Robert T. Matsui (D-Sacramento), a member of the Ways and Means Committee, said. “But, if the Administration doesn’t get its proposal out early in May, all the momentum could fall apart.”

One congressional source suggested that, if the Administration wants to get a tax reform bill completed as soon as possible, the only way to do it would be to strip the proposal of its more complex provisions, leaving them for later.

A more modest plan similar to the Democratic proposal by Sen. Bill Bradley of New Jersey and Rep. Richard A. Gephardt of Missouri could be drafted quickly, he said, if the White House decided it was more important to move quickly than to win approval of a total package.

Struggle to Develop Plan

Treasury officials, meanwhile, are still struggling to develop their new tax revision plan and have disclosed that Reagan will not be presented with the final decisions on the measure until after he returns from Europe on May 7.

Congressional sources say Treasury officials want to push the top individual tax rate below the 35% rate proposed in the original plan last year. But the trade-off for this would probably require cutting the proposed $2,000 personal exemption contained in the initial Treasury outline, which is about double the current personal exemption.

That could undermine the goal of removing the income tax burden for families below the poverty line and lightening tax payments for the vast bulk of low- and middle-income taxpayers who rarely itemize deductions.

Flexibility Is Limited

The drop in the top rate also might require a higher corporate rate than the 33% rate proposed last year, but the Administration’s flexibility is limited because Treasury officials are determined to keep the top personal rate and the corporate rate within six percentage points of each other.

Given those difficulties, most congressional sources expect the Administration to stick fairly close to the original Treasury goal of a relatively neutral code that would tax individuals with similar incomes at about the same rate, and would require many corporations to pay higher taxes by scaling back specialized tax preferences.

However, there probably will be modifications in some of the more controversial aspects of the plan, such as the provisions limiting deductions for charitable contributions and imposing taxes on some fringe benefits.