Panel Stumbles on Issue of Charitable Deductions : Tax Work Delayed at Least a Week

The House Ways and Means Committee’s efforts to produce a tax overhaul plan stumbled into confusion Tuesday over the controversial issue of charitable deductions, and the panel suffered a potentially crippling setback as it put aside its work for at least a week.

Action ground to a halt because the committee’s chairman, Rep. Dan Rostenkowski (D-Ill.), was preparing to lead a delegation of 48 House members into negotiations with Senate leaders over a proposal to mandate major spending cuts to achieve a balanced federal budget within six years. Included in the delegation will be 16 members of the Ways and Means panel.

Both supporters and opponents said they are not ready to consider President Reagan’s tax revision plan dead for the year, but they suggested that the prospects of approval before the House adjourns in several weeks are rapidly declining.

‘Isn’t Dead Yet’

“We finally accomplished something, but it’s so complicated that I don’t think it can hold up,” said California Rep. Robert T. Matsui (D-Sacramento), who generally backs tax overhaul. “Tax reform isn’t dead yet, but it is facing tremendous problems because there’s still no consensus on the thorny issues.”

And Rep. Raymond J. McGrath (R-N.Y.), who is opposed to a key proposal to curtail state and local tax deductions, gloated: “The tax overhaul effort isn’t over, but it has acquired a lot of heavy baggage. It’s going to be a real struggle to keep both balls (tax revision and the balanced-budget proposal) in the air at the same time.”

After two weeks of talk but little action, the Ways and Means Committee finally agreed to allow taxpayers who do not itemize deductions to continue to write off charitable contributions that exceed $100--defying both Reagan and Rostenkowski, who had proposed to eliminate the deduction.

Limited to Half

Under current law, non-itemizers are scheduled to get a full deduction for charitable contributions in 1986, but the deduction this year is limited to half of the contribution. Taxpayers who itemize would continue to deduct the full amount.

But to compensate for the $7 billion in revenue that the plan would cost over five years, the panel also approved a complicated formula for readjusting the standard deduction.

At the same time, the committee rejected a White House plan, supported by Rostenkowski, that would tighten deductions for the banking industry and instead voted to give banks and thrift institutions an additional $5.9-billion tax break by increasing the size of their bad debt reserves.

The overall effect of the committee’s action affecting financial institutions would reduce taxes by an estimated $1 billion instead of boosting them $7.8 billion, as recommended by Reagan and Rostenkowski.

Debt Ceiling Issue

According to committee aides, Rostenkowski vowed to keep tax revision from stalling while Congress struggles for the rest of the month with the problem of shaping the balanced-budget amendment into a politically acceptable form that will permit passage of a $2-trillion national debt ceiling.

But on Monday, Senate Majority Leader Bob Dole (R-Kan.) said that a lengthy bargaining session over the debt-ceiling increase “may well doom tax reform.”

Torn between pleas from charitable groups to keep the deduction and worries over losing revenues, the committee accepted a Rube Goldberg-like proposal by Rep. Judd Gregg (R-N.H.) to pay for the tax break by trimming the proposed increases in standard deduction levels it tentatively accepted only last week.

Level Would Be Cut

Under the proposal, low-income people would receive the highest standard deductions, but the level would be cut $50 to $200 for most other taxpayers. Married couples, for instance, would not receive the full $5,950 standard deduction if their income exceeded $14,000, while heads of households earning more than $10,500 and single people with adjusted gross incomes above $8,000 would have their standard deductions trimmed as well.

Debate over the charitable proposal was heated, lawmakers said, and some committee members lashed back at Deputy Secretary of the Treasury Richard Darman, who complained during the closed session that allowing charitable contributions for non-itemizers would undermine tax revision.

At the same time, the committee approved an amendment that would save banks about $4.7 billion and savings institutions about $1.2 billion by allowing them to increase the money they set aside for bad debts.

Some of the money would be regained by tightening the deductions for banks that purchase municipal bonds and requiring financial institutions to follow the same rules as other corporations on losses that are written off over several years.