Panel Would Kill Tax Credit for Investment
The House Ways and Means Committee, finally digging into the heart of business tax issues, agreed Tuesday to eliminate the investment tax credit and adopted a new system of write-offs for purchases of plant and equipment that would require business to stretch out deductions to as much as 30 years.
The compromise, originally worked out among six members of the tax-writing committee, falls only slightly short of panel Chairman Dan Rostenkowski’s original goal and is expected to raise $160 billion from business over the next five years.
Rostenkowski (D-Ill.) praised the committee action, although he acknowledged that it could ignite strong opposition from lobbyists and members of the House. “If someone is looking for a reason to vote against the tax bill, there’s every reason in the world. But we’re going to have to highlight the fact that tax rates will be reduced. Corporate America will start paying their fair share of tax.”
The committee settled such issues as tax shelters, business investment and research and development but adjourned for the evening without resolving oil industry tax treatment.
In addition, a separate group of panel members informally agreed to extend for three years the research and development tax credit, scheduled to expire at the end of this year, but also proposed to trim it from 25% to 20%. The group’s recommendation was later adopted by the full committee.
The decision to extend the research and development credit is of crucial importance to high-technology industries concentrated in California and New England. The panel also rejected several proposals from the committee staff that would have diluted the value of the research and development tax credit and agreed to extend the credit to research conducted at colleges and universities.
“We preserved at least 80% of current law for R&D;,” said California Rep. Robert T. Matsui (D-Sacramento), who had been active on behalf of high-tech industries in Silicon Valley near his district.
The committee is nearing completion on its version of President Reagan’s tax revision package. Rostenkowski told panel members that he wants to complete action on the bill this weekend before adjourning for the Thanksgiving holiday and said he will not allow them to leave until they reach agreement.
The full committee, finally getting under way late Tuesday afternoon, quickly approved a task force recommendation to retain the deduction for mortgage payments on second homes and accepted its proposal to continue to allow most types of real estate tax shelters.
The panel voted to limit the second-home deduction for non-business interest to $20,000 for a couple and $10,000 for an individual. That limitation would be phased in over 10 years.
“They kind of grunted it through,” one staff member said, referring to the speed with which the full committee acted on the tax shelter issue.
Business groups immediately blasted the decision to eliminate the investment tax credit, which provides a tax cut equal to as much as 10% of the cost of any new investment in plant and equipment.
“This is pretty serious,” said Rachelle Bernstein, an official of the U.S. Chamber of Commerce. If the business tax changes are approved by Congress, she contended, “I think you’re really going to see a business slowdown.”
Action Called Crucial
However, Rep. Richard A. Gephardt (D-Mo.) said that eliminating the investment tax credit was crucial to raising enough revenue to lower overall tax rates. “If we hadn’t been able to hold on to the investment tax credit, you wouldn’t have been able to have a tax reform bill,” Gephardt said. “Without this . . . it would be impossible to have rate relief for corporations and individuals.”
As part of its proposed changes in business tax rules, the working group also agreed to make the benefits of depreciation write-offs considerably more generous in the early years, tapering off in value in later years. Under depreciation rules adopted by the committee, a business that buys a piece of equipment expected to last several years can deduct the cost of that investment over a similar period.
The committee also accepted in part a proposal from the Treasury Department to allow investment tax rules to be adjusted for inflation if price increases exceed 5% a year.
In place of the current system of depreciation, which places most investments in four categories with write-offs of three to 18 years, the panel adopted a system with 10 categories stretching from three to 30 years. One of the most significant changes would require business to deduct car purchases over five years instead of the current three years.
The panel’s system of business write-offs would be considerably less generous than that proposed by the Reagan Administration, but the group rejected Reagan’s recommendation to raise nearly $60 billion by imposing a so-called “windfall” tax on firms that would benefit from lower tax rates.
Real estate lobbyists were disturbed by the panel’s decision to stretch out deductions for buildings from the current 18 years to 30 years. The task force also decided to limit most real estate write-offs to equal annual installments, allowing only low-income housing to benefit from faster depreciation rules.
The panel’s intricate changes to the system of business write-offs covered such minute issues as rental tuxedos and the difference between race horses and show horses, while making other decisions affecting billions of dollars in tax breaks for such capital-intensive industries as electric utilities, telephones and cable television.
