Tax Battles Ahead but Leaders See Reform of System

President Reagan’s tax revision package has a better chance of becoming law than any major reform plan in at least several decades, Administration and congressional leaders agree, but still faces a no-holds-barred onslaught from special-interest groups and key legislators determined to preserve dozens of tax preferences that the White House plan would abolish.

“Nobody ever said it was going to be easy,” Treasury Secretary James A. Baker III declared Wednesday. “What we will seek very hard to prevent from happening is a piecemeal picking away or destruction of the proposal.

“And with strong bipartisan support, which we think we now have,” he added, “we’ve got a fair shot of keeping it reasonably intact.”

Prominent Champions

Yet overhauling the federal income tax system is an idea that had prominent champions among both Democrats and Republicans in Congress long before the Reagan Administration committed itself to the cause. And even before the Administration unveiled the specifics of its tax package Wednesday, political maneuvering over the eventual shape of any tax reform package had already begun in earnest.

The two legislators who will have the most immediate impact on such a package, House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) and Senate Finance Committee Chairman Bob Packwood (R-Ore.), both expressed support for tax reform in general and predicted that Congress would approve a tax overhaul.

Signficant Changes Seen

But they suggested that Reagan’s particular formula could undergo significant changes as it wends its way through the legislative process.

At the same time, several potential 1988 presidential candidates immediately staked out varying positions on the tax proposal, suggesting that rivalries among presidential contenders will also be a factor in the final outcome.

Democratic Sens. Edward M. Kennedy of Massachusetts and Gary Hart of Colorado welcomed Reagan’s support for tax revision, which they said was first proposed several years ago in a plan promulgated by Sen. Bill Bradley (D-N.J.) and Rep. Richard A. Gephardt (D-Mo.).

“The details of the President’s plan will reveal whether the reality matches the rhetoric,” Hart said. “If the President’s plan is a gift horse for working Americans, my party will be the first to support it, but if it is a Trojan horse for special interests, we will be the first to expose it.”

Mario M. Cuomo, the Democratic governor of New York and another potential presidential candidate in 1988, attacked the plan’s repeal of the deduction for state and local taxes as an “insult,” while Rep. Jack Kemp (R-N.Y.) repeated his vow that he would attempt to persuade Congress to reduce the top tax rate of 35% in the Reagan package to 30%.

Obstacles Surveyed

Surveying those and other obstacles that loom beyond the initial welcoming remarks from most lawmakers, economist Alan Greenspan, a former top official under President Gerald R. Ford, declared:

“Anyone who thinks this is going to run through Congress like a hot knife through butter has not observed the political process in this country.”

In essence, Reagan’s tax package would lower tax rates and widen the personal exemption for individuals, while eliminating or curtailing many existing tax breaks, including the state and local tax deduction and the special marriage deduction for two-earner couples. The mortgage interest deduction would be retained on owner-occupied homes, though other interest deductions would be curbed.

The top tax rate on corporations would be cut from 46% to 33%, but business would lose the investment tax credit, and the accelerated depreciation system that was a central feature of Reagan’s 1981 tax cut would be scaled back.

And, in a tangential blow to a cause dear to liberal political reformers, Reagan’s plan also would abolish the system for public financing of presidential elections.

Majority Would Pay Less

Measured against the current tax code, Reagan’s proposal would provide an overall income tax cut for individuals of about 5.2% in 1990, while raising corporate tax payments by 22.7%, the Administration estimates. Almost three-fifths of all taxpayers would pay less in federal income taxes, while another one-fifth would be no worse off.

The plan is similar in many ways to a tax proposal released last November by the Treasury Department that was never embraced by Reagan. It makes several modifications in the original package, however, that are designed to defuse opposition from industry, charities, investors and recipients of employer-paid fringe benefits. The White House plan would be slightly less generous to individuals than the original Treasury proposal and would hit corporations with a somewhat smaller tax hike.

‘Some Bones to Gnaw On’

Despite the changes, several legislators predicted that special-interest groups would continue to battle to preserve existing tax breaks. “We will probably do a fair amount of adjustment,” said Rep. Bill Frenzel (R-Minn.), a senior member of the House Ways and Means Committee. “The President obviously has left some bones for Congress to gnaw on.”

California Rep. Robert T. Matsui (D-Sacramento), also on the Ways and Means Committee, suggested that legislators will be “inundated” by lobbyists representing restaurant and entertainment businesses because of the limits proposed by the White House on business deductions for meals and entertaining.

He added that fringe benefits, which would be taxed only to a limited extent, would “remain a flash point” in the tax debate, and that such high powered business lobbyists as Charls E. Walker have already been hired to fight to keep the tax exemption for industrial development bonds issued by local governments for private construction projects.

State Tax Deduction

The lawmakers agreed, however, that the biggest battle would be over eliminating the state and local tax deduction.

Treasury Secretary Baker, in a news conference Wednesday, said the Administration’s tax proposal should not be compared to the original Treasury package, which was prepared under his predecessor, current White House Chief of Staff Donald T. Regan. He acknowledged that changes from that proposal were aimed at meeting “legitimate concerns from the standpoint of capital formation, entrepreneurship, incentives, savings, investment, those kind of things. Now, I hope that in the process of doing that we’ve built some support for the package.”

But Rep. Gephardt, co-author with Bradley of a Democratic tax overhaul plan, said the White House plan is “clearly a retreat from Treasury I, a retreat from where at least part of the Administration was in December.”

‘Give-Backs’ Questioned

He questioned what he called “give-backs” in the new package to particular special-interest groups, contending: “Lobbyists already are saying: ‘We got a third of what we wanted. Now we want the rest of it.’ ”

Gephardt tempered his comments, though, calling Reagan’s proposal “an important contribution to tax reform.”

In contrast to Gephardt, Bradley had welcomed Reagan’s tax package enthusiastically Tuesday night.

Reagan’s tax overhaul, however, may have to compete against an alternative proposal to impose a minimum tax on corporations and wealthy individuals advocated by many congressional Democrats.

Existing Minimum Tax

Although the White House plan also includes several provisions to strengthen the existing minimum tax, some tax reformers worry that a separate minimum tax could easily be exploited to satisfy public complaints that some highly profitable corporations escape taxation under current law. But such legislation actually would do little to eliminate tax loopholes.

“Want to see a special-interest lobbyist grin over his three-martini lunch?” a report released last week by the House Republican Conference noted sarcastically. “Threaten him with a corporate minimum tax.”

Administration officials said Wednesday that they hope to win approval of a tax bill in the House by October, followed by a Senate vote soon thereafter, and a conference committee that would reconcile differences concluded before Christmas.

But they acknowledged that many problems lie ahead.

In the Senate Finance Committee, for example, a Treasury official said the original proposal’s formula for taxing fringe benefits was cut back severely to win over committee Chairman Packwood, who has become a more active booster of the White House tax package.

Yet many committee members said the concessions did not go far enough and vowed to keep fighting.

CURRENT LAW VS. REAGAN’S PROPOSAL INDIVIDUALS

Current Law Tax rates 11%-50% Tax brackets for singles 15 Tax brackets for families 14 Personal exemption $1,080 Standard deduction $2,480 for singles, (zero bracket amount) $3,670 for families Two-earner deduction $3,000 maximum Earned income credit $550 maximum for working poor Child care expenses Tax credit Employer contributions Not taxed to health insurance State and local Deductible income taxes Other state and local Deductible taxes Charitable contributions Deductible even by taxpayers who do not Mortgage interest Deductible Other personal interest Deductible Individual Retirement $2,000 maximum for Accounts workers, additional $250 for non-working spouses Salary set-asides “401(k)” plans provide a tax exemption for income, including employer matching contributions, set aside for retirement Capital gains 60% excluded from taxes Dividends $100 exclusion for singles, $200 for families Unemployment and Disability is untaxed and disability compensation unemployment is taxed if total income exceeds $18,000

Reagan Proposal (in effect in 1986) Tax rates 15%-35% Tax brackets for singles 3: 15% tax rate for taxable income from $2,900-$18,000; 25% for $18,000-$42,000; 35% for $42,000 and up Tax brackets for families 3: 15% tax rate for $4,000-$29,000; 25% for $29,000-$70,000; 35% for $70,000 and up Personal exemption $2,000 Standard deduction $2,900 for singles, (zero bracket amount) $4,000 for families Two-earner deduction Repealed Earned income credit $726 maximum for working poor Child care expenses Tax deduction Employer contributions Taxes on first $10 a to health insurance month for singles, first $25 a month for families State and local Not deductible income taxes Other state and local Deductible only if taxes incurred in active business activity or rental property Charitable contributions Deductible only for itemizers itemize deductions Mortgage interest Deductible for principal residences only Other personal interest Deduction limited to $5,000 more than investment income Individual Retirement $2,000 maximum for Accounts everyone Salary set-asides 401(k) plans capped at $8,000 a year minus any contribution to an individual IRA Capital gains 50% excluded from taxes Dividends Repealed Unemployment and Both fully taxed disability compensation

CORPORATIONS

Current Law Tax rates 46% maximum Minimum tax 15% Dividends No deduction Investment tax credit 6% to 10% Depreciation of plant Businesses write off and equipment capital costs in 3 years (cars) to 18 (real estate) “Windfall” tax None Oil tax breaks Deductions for a percentage of profits, to offset depletion of of resources, and for all drilling costs Municipal bonds All bonds issued by government entities exempt from tax

Reagan Proposal (in effect in 1986) Tax rates 33% maximum Minimum tax 20%, with stricter definition of what income may be excluded from the minimum tax Dividends Deduction of 10% of dividend payments Investment tax credit Repealed Depreciation of plant Businesses write off and equipment inflation-adjusted capital costs in 4 year (cars) to 28 years years (real estate) “Windfall” tax Businesses claiming accelerated depreciation of plant and equipment would defer some taxes subject to current higher rates (46% maximum) to lower rates (33% maximum) under the new plan. Reagan proposal would tax 40% of this “windfall.” Oil tax breaks Percentage depletion allowance phased out over five years except for the smallest wells; deduction for drilling costs retained Municipal bonds Bonds issued for private purposes taxable