House Panel Draft of Tax Plan Gains : Could Win Chamber’s Approval in ‘85; Expected to Fall Short of Reagan Goal

The House Ways and Means Committee, after nearly a month of patient, step-by-step deliberations that were going nowhere, has finally begun to make great strides toward producing a tax revision package that could win House approval this year.

But by the time the committee completes its work sometime next month, members conceded Sunday, it will probably have made so many political compromises on President Reagan’s tax plan that it will fall far short of his original goal of eliminating dozens of tax breaks and drastically cutting tax rates.

“Writing a tax bill reminds me of ranching back home,” Rep. Byron L. Dorgan (D-N.D.) said. “While some of us are trying to fix the fence, the cows are getting out through all the other holes.”

Back-Room Negotiations

Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), after holding a week of backroom negotiations with other committee members and leading rare weekend legislative drafting sessions, said Sunday that he expects committee approval of a bill within four weeks and House floor action before Congress adjourns for the year.

That, most lawmakers believe, should rebuild the sagging momentum for tax revision. And it should leave enough time before the 1986 congressional elections for the Senate to pass a bill of its own and for Congress to forge a consensus between the two versions that could go to Reagan for his signature.

At a news conference Sunday, Rostenkowski conceded that the prospects for tax revision recently looked “very, very dim,” but he quickly added: “I’m starting to see a little sunshine.”

‘Not Going to a Funeral’

If tax overhaul were dead, he said, the hallway outside the closed committee meeting would not have been packed with lobbyists eager to influence votes on issues varying from the state and local tax deduction to the three-martini lunch. “I can tell by all the (pin-striped) suits in the hall that we certainly aren’t going to a funeral,” he said.

The overall goal of producing a bill that significantly lowers tax rates without worsening the federal deficit may ultimately prove to be the committee’s most difficult balancing act.

By its own calculations, the decisions it had made through Sunday night would boost the deficit by about $16 billion over five years.

Easing ‘Double Taxation’

In its four-hour session Sunday, the panel voted to phase in over 10 years a plan allowing corporations to deduct from their income 10% of the amount they pay to their shareholders as dividends. The move was designed to ease somewhat the “double taxation” of corporate profits, first as income taxes paid by the company and then as personal taxes paid by individual shareholders on the dividends they receive.

This proposal would cost the federal Treasury about $2.1 billion over the next five years. President Reagan had proposed allowing the 10% deduction to take effect all at once, costing $16.2 billion.

The committee also took a number of tentative stands Sunday aimed at picking up revenue.

It agreed to repeal the law that allows a family to exclude from taxable income the first $200 of dividend income ($100 for single taxpayers). It also voted to reduce the incentive for upper-income families to juggle funds among trust accounts to lighten their overall tax burden and to shift income to their children, who generally have lower tax rates.

In addition, the panel approved cutting several tax breaks for cor porations that buy money-losing firms simply to take advantage of the losses they carry on their books, and it voted to limit the tax benefit for companies that set up employee stock ownership plans.

After more than three weeks of scant progress, the committee reached a breakthrough last week when Rostenkowski held a series of private meetings with individual members and indicated that he was willing to leave the existing deduction for state and local tax payments intact.

Reagan had wanted to abolish the state and local tax deduction to raise about $165 billion in revenues over the next five years to pay for reducing overall tax rates. But committee members from New York and other high-tax states had vehemently resisted, and even some panel members who supported trimming the deduction conceded that tampering with it would probably be fatal to any tax bill on the House floor.

While the panel continued during its weekend deliberations to cut back on several current tax preferences, it also proposed some new tax breaks and spared many generous tax incentives now enjoyed by certain special interests. Rostenkowski finally acknowledged privately that to do otherwise would be to doom the prospects of winning committee approval of an overall package.

New 20% Tax Credit

The panel, for example, went along with a new 20% tax credit for small business proposed by Rep. Judd Gregg (R-N.H.); carved out an exception for airports, port facilities and garbage disposal facilities from the general limits on the use of tax-exempt bonds for specialized purposes; and went along with the proposal by Rep. William M. Thomas (R-Bakersfield) to grant favored tax treatment for the use of cross-fertilization in the development of new strains of cotton and other plants.

By preserving so many current tax preferences, the committee will find it all but impossible to produce a so-called “revenue-neutral” bill and still slash tax rates as much as recommended by Reagan, who insists that the top individual tax rate should be cut from 50% to 35%.

“It’s certainly not going to be as much reform as I’d like to see,” said Rep. Fortney H. (Pete) Stark Jr. (D-Oakland).

‘Political Accommodations’

Stark said he continues to support the tax revision effort because, “on balance, it will be reform if we (eliminate some tax breaks) and lower the rates” somewhat below current law.

But Rep. Bill Frenzel (R-Minn.) complained that the panel has become more interested in “political accommodations” than in “writing a good tax bill. We’ve gotten off the policy trail into the political compromise routine.”

Rep. Robert T. Matsui (D-Sacramento), however, cautioned that some of the tax breaks the committee has voted to retain might be dropped at a later stage of deliberations. “It’s a bit premature to be bad-mouthing the proposal before we’ve finished,” he said.