Revision of Tax Code Near End : But Revenue Shortfall Delays House Panel

The House Ways and Means Committee, after some last-minute number-shuffling, moved toward completing work early this morning on a sweeping revision of the tax code that would reduce the top personal income tax rate from today’s 50% to 38%.

The panel had been almost ready to approve a package when it discovered that its compromise would not raise as much revenue as the current tax system. So the members started juggling tax brackets and effective dates.

Altogether, the changes approved by the committee and those still pending would provide a modest tax cut for most individuals and boost taxes on corporations by more than $120 billion over the next five years.

Pending before the committee, meeting in closed session as scores of lobbyists clustered outside, was a package proposed by Chairman Dan Rostenkowski (D-Ill.) that would make significant changes in President Reagan’s tax overhaul plan of last May.

Unlike Reagan’s proposal, Rostenkowski’s package would retain the deduction for state and local tax payments, increase slightly the capital gains tax, curtail more business tax write-offs and retain tax breaks for second homes and 401(k) retirement programs.

Rostenkowski proposed telescoping today’s multiplicity of individual tax brackets into four groupings: a 15% tax rate for couples’ taxable income up to $22,500; 25% for the $22,500-to-$43,000 bracket; 35% for the $43,000-to-$100,000 bracket and 38% for any additional income. Although many of the tax provisions are designed to become effective at the beginning of 1986, the rate cut would be delayed for six months.

President Reagan had proposed only three tax brackets, taxed at 15%, 25% and 35%. Administration officials have indicated that Reagan probably will not oppose Rostenkowski’s formula.

35% Rate for Businesses

Corporations would face a top tax rate of 35%, contrasted with the 33% in Reagan’s proposal. But those cuts, too, would be delayed six months.

Faced with the 11th-hour revenue shortfall in its package, Rostenkowski proposed a complex series of changes that would delay some tax reductions and limit certain tax breaks.

In addition, he proposed that itemizers would receive a $1,500 personal exemption, with the full $2,000 exemption, which Reagan had proposed, available only to those who do not itemize deductions. Under current law, the personal exemption would be $1,080 next year.

The Ways and Means chairman proposed taxing 58% of capital gains--profits from long-term investments. With Rostenkowski’s proposed 38% maximum individual tax rate, the top tax on capital gains would be 22%. Under current law, 40% of capital gains are taxed, for a 20% maximum tax rate.

But, when the committee discovered that Rostenkowski’s tax package would have resulted in a small overall loss of tax revenue, it considered compensating by increasing his proposed capital gains tax rate.

‘Broadest Reform Bill’

Calling the plan the “broadest reform bill in history,” Rostenkowski urged his colleagues to support it because it would remove poor people from the income tax rolls, maintain nearly all popular deductions for middle-income families and clamp down on tax shelters used by the wealthy.

“We’ll have a product that members can be proud of,” said Charles B. Rangel (D-N.Y.), a senior member of the panel who fought hard to retain the state and local deduction that particularly benefits taxpayers in such high-tax states as New York, California and Massachusetts.

That decision and such other politically sensitive moves as finding a politically acceptable way to tax certain fringe benefits were left until the closing hours of the committee’s deliberations, which were strung out over two months. Under the proposal, health insurance premiums would not be taxed but other fringe benefits, such as employer-paid life insurance policies, would be.

Rangel acknowledged that Rostenkowski “had to compromise to a large extent to pick up broad support.” He predicted that the bill would pass the House this year.

Senate Prospects Uncertain

Prospects for the bill are far less certain, however, in the Republican-controlled Senate, where tax revision faces much greater opposition. Because the Senate will not be able to act until next year, the bill is not likely to become effective before the beginning of 1986--if enacted at all.

In nearly two months of closed-door debate, the Ways and Means Committee made sweeping changes in dozens of tax provisions.

Among the key actions:

--Standard deduction. Starting in 1987, couples would receive one $4,800 standard deduction, up from $3,670 under current law, while singles would get a standard deduction of $2,950, up from $2,480. The elderly and blind would receive an additional standard deduction of $600. The two-wage-earner deduction would be dropped, but the rates would be adjusted to partially compensate for the so-called marriage penalty.

--Charities. Taxpayers who itemize deductions still would be able to deduct charitable contributions, and non-itemizers could deduct any such contributions in excess of $100. Reagan had proposed eliminating the charitable deduction for non-itemizers.

--Interest deductions. Interest payments on mortgages for both first and second homes would remain deductible, but the plan would impose a limit of $20,000 per family ($10,000 for singles) above investment income on all other non-business interest expenses, including loans for investments. Reagan wanted to retain the mortgage deduction only for principal residences and to limit the deduction for all other borrowings to $5,000 more than investment income.

Limit on 401(k) Plans

--Retirement plans. The panel agreed to continue employer-sponsored 401(k) retirement savings programs but to limit personal contributions to $7,000 a year. Individual Retirement Accounts would remain the same, with a workers’s contribution limited to $2,000 annually and the overall limit for a couple with a nonworking spouse held to $2,250. But employees who contribute to a 401(k) plan would have to reduce their IRA contributions by an equal amount. The White House had wanted to eliminate 401(k) plans and to expand the IRA limit for a couple with a non-working spouse to $4,000.

--Business investments. The panel went along with Reagan’s proposal to repeal the investment tax credit, which provides an immediate tax cut of up to 10% for purchases of plant and equipment. It would also limit tax breaks for depreciation--annual deductions to account for the aging of business equipment. The depreciation plan, although less generous than Reagan’s proposal, does not include a $60-billion White House plan to tax corporations that received large depreciation tax breaks from the 1981 tax law. Altogether, the committee’s changes are expected to raise $168 billion over five years.

Cost of Entertainment

--Business expenses. One-fifth of the cost of business meals and entertainment would no longer be deductible, but business-related travel for hotels, airline tickets, taxis and other such expenses would remain fully deductible. Reagan had proposed a more limited approach to curbing business meals but would have eliminated entertainment deductions.

--Minimum tax. The panel significantly strengthened Reagan’s proposal to increase the minimum tax for high-income individuals and profitable corporations that make substantial use of legal tax breaks and it clamped down on taxpayers who report large paper losses on their investments.

--Tax-exempt bonds. The plan would eliminate some tax-exempt bonds used for special purposes and tighten the state-by-state limits on all others. Municipal bonds used for traditional government functions, such as highway construction, would remain tax-exempt. Reagan had wanted to eliminate special-purpose tax-exempt bonds, such as shopping center developments and other projects.