Tough Minimum-Tax Plan Approved by House Panel

The House Ways and Means Committee, nearing completion of a comprehensive tax-revision package, Thursday approved a minimum-tax plan aimed at imposing a much heavier tax burden on nearly all high-income individuals and profitable corporations that currently pay little or no tax and agreed to limit deductions for business meals and entertaining.

The panel adopted a minimum tax provision that would raise, over the next five years, an additional $27 billion from individuals and $9 billion from corporations that take special advantage of legal tax breaks.

The committee also moved to tax 20% of the cost of all business-related meals and entertainment, raising $9.7 billion over five years. The panel also agreed to remove tax deductions for luxury suites at sports facilities.

Meanwhile, Rep. Dan Rostenkowski (D-Ill.), chairman of the committee, circulated a letter to all House members emphasizing that the final bill would lower the top personal tax rate from the current 50% to about 38%, while taking 6.3 million poor people off the tax rolls and providing a tax cut for most families.

President Reagan, in the tax overhaul plan he offered last May, had proposed to cut the top rate to 35%. But congressional sources said Reagan has agreed privately not to oppose a bill emerging from the Democratic-controlled Ways and Means Committee that reduces the top rate to 38% and retains the current deduction for state and local taxes, which the White House had wanted to abolish.

Rostenkowski, in his letter, urged wary House members to postpone judgment on the complex and controversial tax bill, contending that the final package represents a victory over special-interest groups that fought to preserve most of their tax breaks. The measure would end the “annual embarrassment about mega-corporations that pay nothing,” he said.

The committee’s bill, Rostenkowski argued, is “a massive improvement over present law.” If the bill is enacted, he said, it would maintain the “most popular deductions for middle-income families” and would reverse “a long trend of eroding corporate taxes by shifting more than $100 billion from the individual to the corporate side over the next five years.”

Halls Crowded

With the committee moving to complete work by this weekend, the halls around the closed meeting room were more crowded than ever, reflecting the intense concern among lobbyists seeking last-minute favorable treatment for their clients.

Under the minimum-tax plan adopted by the committee, individuals who drastically reduce their taxable income by claiming “excessive” tax preferences would face a stiff 25% alternative tax rate on a much wider definition of their overall income. It would particularly hit hard at individuals who report mostly paper losses on tax shelters and other investments, raising nearly half of its revenue from such taxpayers.

Current Tax Breaks

Through a host of tax breaks in current law, many wealthy taxpayers pay only a relatively small percentage of their income in federal taxes. According to the Treasury Department, in 1983 more than half of all individuals earning at least $250,000 a year paid less than 20% of their income in taxes, and more than one in 10 paid taxes of less than 5% of their income.

Although current law also includes a minimum tax, imposed at a 20% rate on individuals and 15% on corporations, it is relatively toothless because it exempts many tax preferences, raising only about $2.5 billion a year from about 235,000 individuals and less than $500 million from businesses.

In restricting the use of certain deductions and credits and making more tax preferences subject to the 25% minimum tax, the committee rejected several proposals to water it down.

The panel voted to require taxpayers who must pay the minimum tax to include such additional items as foreign income, tax-exempt bonds used for specialized purposes and most tax-shelter losses. However, tax-exempt bonds used for traditional government functions would remain exempt from the minimum tax. And the committee agreed to limit the minimum tax rate on capital gains to the normal capital gains rate and exempted tax breaks for corporations doing business in Puerto Rico from the minimum tax. The new corporate minimum tax also would be set at 25%.

Investment Tax Credits

The committee forged a compromise on several hotly contested issues involved in the minimum tax. It adopted a special provision aimed at helping loss-ridden steel companies take advantage of unused investment tax credits in the future.

It accepted another provision that would exempt research and development tax credits, heavily used by high-technology companies, from the minimum tax.

It also compromised with charities and colleges that had fought against including the increased value of gifts of property in the minimum tax.

Under current law, gifts to charities can be deducted at full value, even if a taxpayer paid much less for the property. The committee agreed that the full amount of such gifts would remain deductible and would be included in the minimum tax only up to the point where it equals the combined total of other tax preferences.