Rostenkowski Reportedly Favors Top Individual Tax Rate of 38% Instead of 35%

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) has indicated that he would support a top individual tax rate of 38%, despite President Reagan’s insistence that the rate go no higher than 35%, a committee member said Friday.

The decision, which brings the committee closer to fashioning a sweeping tax bill, is an effort to recapture revenues lost under Rostenkowski’s tentative decision to leave the existing deduction for state and local taxes intact. “It has been done. It could unravel, but it’s been done,” the committee member said.

The congressman, who asked not to be identified, said that Rostenkowski also had told individual committee members in private meetings that he is prepared to recapture more revenues by replacing the $2,000 personal exemption proposed by the White House with a tax credit, possibly of $300.

Wealthy Would Lose

Low-income taxpayers would receive about the same benefit from a $300 tax credit as from a $2,000 exemption, but taxpayers in higher brackets would be significantly worse off.

The behind-the-scenes negotiations are taking place as the committee continues efforts to produce its own version of a tax overhaul plan that would reduce both individual and corporate tax rates by eliminating many current tax breaks.

Meanwhile, the committee, in the first day of an extraordinary three-day negotiating session that will continue through Sunday, quickly reached tentative agreement to:

--Give more generous tax breaks to small business than current law provides.

--Make a number of minor changes in tax rules for farmers.

--Put new limits on the abilities of state and local governments to issue tax-exempt bonds that do not raise funds for such traditional government services as highway construction.

‘Train on Right Track’

Such apparent progress in both the official sessions and behind-the-scenes negotiations came after more than three weeks of haggling over smaller issues and indicated that “the train is right on track. The momentum now has shifted,” Rep. Robert T. Matsui (D-Sacramento) said.

But some who have expressed reservations about many of the key proposals that have been advanced by Reagan and Rostenkowski said the committee is acting too quickly.

“The committee is moving too fast and taking bites that are too large,” Rep. Bill Frenzel (R-Minn.) said. “We’re more concerned with political trade-offs than we are with tax policy considerations, and we may wind up with a very large bag full of politics rather than a coherent tax policy.”

Widespread reports Thursday that Rostenkowski was ready to abandon any attempt to limit the deduction for state and local taxes had the White House “extremely unhappy,” said Rep. Guy Vander Jagt (R-Mich.), a Ways and Means Committee member.

Reagan’s Proposal

Reagan had proposed eliminating the deduction as one way to raise the revenue to offset reducing the top individual tax rate from 50% to 35%. Vander Jagt said the White House feared that the committee would be unable to achieve the 35% rate if it kept the state and local tax deduction.

But another committee Republican, who declined to be identified, said Treasury Secretary James A. Baker III is privately telling GOP members to support Rostenkowski’s efforts to put together any package that can pass the House.

“He’s encouraged us to go along,” the committee member said, “because the plan can always be changed in the Senate,” where Republicans hold a majority.

In most of its decisions Friday, as during the past three weeks, the committee attempted to set a middle course between current law and the tougher alternatives that have been offered by Rostenkowski and the White House.

Gains for Small Business

Small business would continue to benefit from lower rates than those imposed on large corporations, and all corporations would pay lower rates than under current law. The committee tentatively approved a top corporate rate of 35%, which is significantly lower than the 46% rate paid under current law, but not as low as the 33% rate recommended by Reagan.

The committee also passed a provision allowing small business to account for its inventories under much simpler rules.

As the law now stands, “small businesses are often forced to pay taxes on paper profits,” said Abe Schneier, tax specialist for the National Federation of Independent Business. “The old rules were so complex that only large corporations could take advantage of them.”

The committee also established a new tax credit to encourage expansion by businesses with sales of less than $25 million.

Tax-Exempt Bonds

Where Reagan and Rostenkowski had proposed eliminating the use of tax-exempt bonds for nearly all non-governmental activities, the committee agreed to allow certain specialized projects, such as multifamily rental housing, port facilities and colleges, to continue to be financed with tax-free bonds.

But the committee agreed to impose certain limits on their use, including a cap on the type of bonds widely used to finance universities and hospitals. Matsui insisted that this was “a terrible decision” that would make it much harder for states such as California to raise money to build such facilities.