Panel Acts to End Income Averaging

The House Ways and Means Committee, making its first substantive decisions on tax revision after finally settling a procedural squabble, voted Thursday to repeal income averaging as part of a sweeping tax overhaul plan.

The committee, following recommendations of President Reagan and Chairman Dan Rostenkowski (D-Ill.), beat back efforts to preserve all or part of the averaging provision of current law. It benefits taxpayers who receive big raises or who are self-employed, such as authors, whose annual incomes fluctuate sharply.

Income averaging allows taxpayers to pay lower rates when their income jumps by more than 40% over their average earnings in the previous three years. Elimination of averaging would add an estimated $8.6 billion to the Treasury over five years.

Taxing Benefits Rejected

In another action taken behind closed doors, the committee rejected a series of proposals that would have forced workers to pay taxes on all or part of their benefits under worker’s compensation, black-lung disability and employer-provided accident and health plans.

A plan by Rostenkowski to tax some of those benefits would have reaped $3.4 billion in additional revenue over five years, which would have been applied to lowering overall tax rates.

The two relatively minor decisions came as the committee delayed action on broader changes in the law, such as restructuring individual tax rates, and as President Reagan traveled to Cincinnati to keep up the political heat to enact a package by the end of the year.

Before deciding on individual provisions, the committee ended four days of bickering over the mechanics of putting together a bill that could represent the most sweeping overhaul of the nation’s tax system since it was established in 1913.

Won’t Use Current Law

Under strong pressure from the White House, the panel abandoned Wednesday’s decision to use existing law as the basis of its decision-making. That approach would have made it harder to enact dramatic changes in the tax code because it would have required a majority vote on each politically treacherous revision in current law.

Instead, the committee decided Thursday to use Rostenkowski’s package of sweeping revisions as its guide. With the committee splintered on almost every major issue, the decision will put subtle but strong pressure behind his plan, which seeks to lower the top individual tax rate from the current 50% to 35%.

“I think this gives us a greater chance of ultimately getting tax reform,” California Rep. Robert T. Matsui (D-Sacramento) said. “What we did yesterday would destroy any chance of getting tax reform.”

But the committee abandoned Rostenkowski’s earlier stipulation that members must offer “revenue-neutral” amendments--that is, that for every proposal that drains revenue from the package, they must find new funds to compensate for the loss.

Committed on Deficit

Even so, committee members said they remain committed to the idea of an overall package that does not add to the federal deficit.

In Cincinnati, Reagan had lunch with workers at a Procter & Gamble soap plant and told them that America should not have to wait “for fairness and the increased growth that lower tax rates will bring.” If Congress balks, he said, “we’re going to send Mr. Clean down there to keep an eye on them and make sure they do the job right.”