Treasury Revises Tax Plan, Drops Fringe Benefits Levy

The Treasury Department has completed work on a revised version of its tax reform proposal that, unlike the original, would not tax such fringe benefits as employer-paid health insurance premiums, sources said Tuesday.

But, like the original Treasury plan, the new one would reduce tax rates and eliminate a number of tax breaks, including the current federal deduction for state and local tax payments.

Top Treasury Department officials began briefing President Reagan on their revised plan this week, according to White House spokesman Larry Speakes. Administration officials emphasized that Reagan still could change the proposal before he sends it to Congress.

Although Administration officials say that they have not set a deadline for submitting the new proposal to Congress, congressional sources say that Treasury Secretary James A. Baker III is aiming for May 13, only a few days after the President is scheduled to return from Europe.

The revised plan, sources say, would reduce the proposed personal exemption from $2,000 to about $1,800 but would not significantly lower the top individual tax rate from the 35% level contained in last November’s Treasury proposal. Under current law, the top tax rate is 50% and individuals receive a personal exemption, $1,040 for 1985, that increases each year with inflation.

The original proposal to tax certain fringe benefits, dropped from the new package, ran into vehement opposition from Senate Finance Committee Chairman Bob Packwood (R-Ore.). The life and health insurance industries and organized labor also campaigned vigorously against the original approach.

And, in response to complaints from charitable organizations, the Treasury would allow individuals to deduct charitable contributions in excess of 1% of their income rather than the 2% floor originally proposed.

Some of the most substantial modifications, including more generous allowances for accelerated depreciation of new plant and equipment and the retention of some special tax preferences for capital gains, are designed to mollify industry groups.

At the same time, the new package retains many features of the original plan, including an overall reduction in the tax burden on individuals and an increase in the corporate tax burden.

The Treasury’s new proposal is expected to stick to the original plan to eliminate the 10% investment tax credit, sources said. But business would lose a feature of the original proposal that would have allowed corporations to deduct part of their dividend payments to shareholders.

The Treasury is expected to drop its original proposal to index both interest payments and interest income to inflation, an approach designed to protect inflation-driven interest income from taxes but to deny tax deductions for interest costs that merely compensate for inflation.

“We have not been involved in any formal negotiations with Treasury, but they had been spending a lot of time taking the temperature up here to find out where the hot buttons are,” one congressional staff member said. “For the last week, though, Baker and (Deputy Treasury Secretary Richard) Darman have gone underground, so it appears that they have pretty much settled on what they want to propose to the President.”

Proposals Hedged

Congressional sources say that Treasury officials have hedged their proposals by insisting that Reagan could make important changes in the plan that might require them to delay announcement of the final package.

Treasury officials have also talked about including a minimum corporate tax in their package, sources said, to capture some revenue from corporations that currently pay no federal taxes on their profits.

Reagan Tuesday repeated his vow that the tax reform proposal would not increase the overall income tax burden. In a speech to the National Assn. of Realtors, he said: “Let me pledge something else to you. I will not be a party to a so-called tax reform if it is a disguised tax increase or if it eliminates the deduction families need for their home mortgage.”

Under the original Treasury proposal, deductions would be retained for mortgage interest payments on a taxpayer’s principal residence and for other interest payments up to $5,000. Reagan is under pressure to allow deductions for interest paid on vacation homes, but it is still unclear whether he will alter the original plan.

Unlike the original Treasury tax reform proposal, which was not embraced by the White House, the new plan is supposed to be endorsed by Reagan and presented as an Administration package. The original proposal was prepared under Donald T. Regan, who became White House chief of staff in February after switching jobs with Baker.

White House officials say they believe that Congress can complete action on tax reform this year, but congressional sources have expressed serious doubts that the Administration proposal can be approved that fast.

Reagan is expected to receive several more briefings on the tax reform proposal from Baker and Darman before leaving on May 1 for Europe, where he will attend the annual economic summit meeting in Bonn and will take part in ceremonies commemorating the 40th anniversary of the defeat of Nazi Germany in World War II.

Treasury officials “seem to have a pretty good idea of what they want to do,” said one congressional staff member, “but Baker is a clever enough politician that he doesn’t want to box the President in.”