Tax Revision Bill’s Fate Is in Hands of Rostenkowski

“Reagan’s bill would not get three votes on our committee,” says Rep. Thomas J. Downey (D-N. Y.).

Downey is talking about the prospects in the House Ways and Means Committee of the President’s top legislative priority, his proposal to overhaul the nation’s tax code. So, when the committee begins closed meetings today to draft its own version of a tax bill, it will be up to Chairman Dan Rostenkowski, the old-school pol from the Chicago Democratic machine, to reshape the White House plan into a bill bearing a Democratic label as much as Reagan’s.

To ensure that a tax bill emerges from his committee, probably near the end of October, and that it has a fighting chance of approval by the House, Rostenkowski will need to enlist most of the 36 members of the panel--23 Democrats and 13 Republicans--in rewriting the Reagan script. That will mean forging a compromise on the proposed elimination of state and local tax deductions, limiting the hefty tax cut for the wealthy and abandoning Reagan’s controversial plan to “recapture” some of the windfall that corporations would reap from lower business tax rates.

Accord Not Assured

Committee agreement is not a foregone conclusion, members and tax experts insist. But they say any bill that can win support from both Democrats and Republicans is likely to include:

--Helping families with two working spouses by retaining the two-earner “marriage penalty” deduction or jiggling the tax rate structure to benefit middle-class taxpayers.

--Keeping the top capital gains rate on profits from investments at its current 20% or even raising it, rather than trimming it to Reagan’s recommended level of 17.5%.

--Making depreciation write-offs for business less generous than under the White House proposal while reducing the maximum corporate tax rate, now 46%, to perhaps only 35% instead of the 33% Reagan proposed.

However, the committee is expected to endorse Reagan’s basic approach: reducing individual and corporate tax rates and eliminating a host of tax breaks. It will probably come close to approving Reagan’s proposal to telescope today’s multiplicity of tax brackets, with a top tax rate of 50%, into three brackets of 15%, 25% and 35%. And it seems ready to eliminate such tax preferences as the 10% credit for investment in business property and equipment.

Facing Unpopular Options

Panel members will work from a 400-page, staff-prepared document outlining a modified version of Reagan’s package, and they have been told that the document will include several potentially unpopular options. For example, some form of the business windfall “recapture” provision is expected to be included in the staff version, which, like the White House package, is designed to raise the same amount of income tax revenue as today’s tax system.

Making the committee members wary is a procedure that will limit their flexibility to change the working document. No one may propose a tax cut; any amendment that would reduce tax revenue must be accompanied by a specific proposal to offset the revenue loss.

So, if lawmakers want to save some of the popular tax preferences Reagan would abolish--and they will be under enormous pressures from interest groups intent on preserving features of the current tax code--they will be faced with the onerous political chore of finding additional revenue sources to compensate for the losses.

As a consequence, the committee will look at limiting or modifying the proposed increase in the personal exemption from the current $1,040 to $2,000, rejecting the extension of full individual retirement accounts to non-working spouses, canceling the proposal to let corporations deduct from taxes 10% of the amount of dividends they pay to stockholders and scaling back tax breaks for oil drilling.

Suffered Two Defeats

In contrast with the last two major tax fights, in which Rostenkowski was defeated by the White House in 1981 and outflanked in 1982, the Ways and Means chairman intends to play a pivotal role this time. And, although he believes the committee will follow his lead, he concedes that his contribution could easily be overshadowed by Reagan’s.

“Sometimes I think I’m (the colonel in ‘The Bridge over the River Kwai’), building the bridge for my enemy,” he said earlier this year. And, like the colonel, Rostenkowski is faced with rising anger and frustration among the committee ranks that are kept under control only by the unusually intense loyalty felt toward the chairman.

“We’d follow him almost anywhere,” said Rep. Robert T. Matsui (D-Sacramento), “but I detect a real unease on the committee that we’re marching off in a different direction from the rest of the House.”

As Rostenkowski digs in for the back-breaking work required in the most massive rewriting ever of the tax code, few other lawmakers share his enthusiasm. Most politicians find the public largely apathetic about tax revision, demanding instead that Congress protect jobs in industries threatened by foreign competition.

‘Democratic Words’

Rostenkowski, never known before as an avid tax reformer, now reminds listeners that tax “fairness” has been a Democratic totem for years. “Why should we let Reagan take the tax issue away from us?” Rostenkowski asked rhetorically. “Reform, simplicity, fairness--those are Democratic words.”

He has been instrumental in convincing House Speaker Thomas P. (Tip) O’Neill Jr. (D-Mass.), his close friend and longtime golfing partner, that House Democrats must approve a tax bill to avoid being branded by Reagan as the slayer of a proposal that would provide most individuals with a tax cut.

And Rostenkowski still hopes his successful stewardship of a tax bill can help him overcome the nearly insurmountable advantage of Majority Leader Jim Wright (D-Tex.) in the race to succeed O’Neill as Speaker in 1987.

Support for overall tax revision has been waning for months among House members, and the lack of interest has now begun to infect even committee members who once thought of themselves as active boosters.

Reform Creating Problems

“When I go on the floor, some members say, ‘We hope you’re going to be successful,’ ” one Ways and Means Democrat said. “But many others say, ‘Why are you doing this?’ . . . It’s creating real problems among our membership.”

So, to keep tax overhaul alive, Rostenkowski will need all the back-slapping, look-you-right-in-the-eye political skills that he has been honing for most of his 57 years.

“I don’t think Danny has a particular bill in mind,” said Rep. Fortney H. (Pete) Stark Jr. (D-Oakland). “Danny’s real talent is not as a tax expert but in getting everyone in the committee to work together to produce a bill. If anyone can do it, he can.”