House Panel OKs Tax Revision Bill : Plan Trims Top Individual Rate to 38%, Raises Exemption to $2,000

After months of delicate political maneuvering, the House Ways and Means Committee approved a comprehensive tax revision bill early Saturday that would reduce the top personal income tax rate from today’s 50% to 38% and raise the personal exemption to $2,000 for most taxpayers.

The measure, approved by voice vote, bears a distinctly Democratic stamp that makes it likely to win approval in the House before Congress adjourns next month. But major tax revision still faces an uphill struggle next year in the Republican-controlled Senate, despite indications that President Reagan will not reject the package put together by Ways and Means Chairman Dan Rostenkowski (D-Ill.).

A haggard but pleased Rostenkowski, speaking to dozens of reporters and lobbyists after emerging from a closed meeting about 3:30 a.m., said Treasury Secretary James A. Baker III, who attended part of the marathon 12-hour session, appeared satisfied with the result.

‘Historical Document’

“Our bill . . . takes away many special benefits enjoyed by very few to give lower tax rates to very many,” Rostenkowski said. “I just hope that (Reagan) can embrace what I feel could be a very historical document.”

He added: “We did what many . . . thought couldn’t be done.”

Outgunned GOP leaders on the Democratic-dominated committee vowed to develop their own alternative in the coming weeks, but they also condemned Reagan’s original plan, suggesting that Republicans will have serious problems agreeing on their own approach to tax overhaul.

“Most Republican members are disappointed with the process,” Rep. John J. Duncan (R-Tenn.) said, adding that only three or four of the 13 GOP committee members approved of the final plan.

The No. 2 House Republican leader, Rep. Trent Lott of Mississippi, was quoted by aides as predicting that about 130 of the chamber’s 182 Republicans will vote against the bill when it reaches the House floor next month.

An aide to the House Democratic leadership, while acknowledging that with little GOP support “for a Republican President’s bill, there’s not a lot of incentive for Democrats to vote for it,” nonetheless predicted that the committee bill would pass.

Although the package is designed to take effect on Jan. 1, 1986, past delays by the White House and continuing debate in Congress are likely to postpone its implementation until 1987, even if a new tax law is enacted by the middle of next year.

The committee’s compromise package conforms in many ways to the approach that Reagan outlined in May: It promises to raise about the same revenue as current law; remove millions of poor people from the tax rolls; sharply reduce tax rates and boost taxes on corporations while providing individuals with a tax cut averaging more than 8% once the plan is fully effective.

But major differences separate the committee bill and the White House plan, which Reagan heralded last May as the centerpiece of his second-term domestic political agenda. Reagan had wanted to cut the top personal tax rate to 35% and increase personal exemptions for all taxpayers from the $1,080 under current law to $2,000.

Some Cuts Delayed

Because the committee decided to preserve several major tax preferences Reagan had wanted to eliminate--most notably the deduction for state and local tax payments--it was forced to delay putting some of the rate cuts into effect and had to juggle tax brackets to keep the package “revenue-neutral.”

In the end, the committee accepted a final plan that telescopes today’s multiplicity of tax rates into four individual tax brackets instead of the three Reagan wanted. It provides for personal exemptions of $2,000 and a standard deduction for couples of $4,800 ($2,950 for singles). These figures would mean that a family of four would not pay any income tax on its first $12,800 in income.

However, taxpayers who itemize deductions (about 45% of the total) would find the personal exemption effectively cut to $1,500 because the amount of itemized deductions would be reduced by $500 per personal exemption claimed.

Another change affecting individuals would require that employee business expenses and miscellaneous itemized deductions be deductible only in excess of 1% of a taxpayer’s adjusted gross income.

Top Business Tax 36%

Last-minute deal-making inside the meeting room shifted more than $10 billion in taxes away from individuals to corporations as the committee accepted a plan that would keep employer-provided fringe benefits tax-free and set the top corporate tax rate at 36% instead of the 35% rate Rostenkowski had wanted.

The package would reduce the personal tax burden by about $137 billion over five years, while raising corporate taxes by an equivalent amount.

Reagan had proposed to slash corporate rates from a maximum 46% to 33% and had called for saving individuals about $123 billion in taxes over a five-year period.

The President’s plan itself was a substantially modified version of a comprehensive proposal from his Treasury Department that was announced almost a year ago.

Yet even as the committee staggered toward the end of a tax-writing process that has stretched over nearly two months, lobbyists for business interests began plotting strategies for retaining billions of dollars in tax breaks eliminated in the committee’s bill.

‘Puts Us Dead Last’

Rehearsing an argument that is sure to receive somewhat more sympathy from members of the Senate Finance Committee, Peggy Duxbury, a lobbyist for the National Assn. of Manufacturers, said that the House panel’s substantial boost in corporate tax burdens “taxes the United States and puts us dead last against all our international competitors.”

And Rachelle Bernstein of the U.S. Chamber of Commerce complained that the House committee plan would “cause a slowdown in economic growth.”

But another business lobbyist, representing the National Assn. of Wholesalers-Distributers, embraced the package. “We’re completely behind it,” said Mary Tavenner, who also works with the White House-backed Tax Reform Action Coalition that represents business groups willing to give up some tax preferences to benefit from lower overall tax rates.

Lobbyists Frustrated

Committee members approved dozens of carefully targeted exceptions aimed at protecting certain special interests from the wholesale pruning of tax preferences, but many lobbyists still expressed frustration at their own lack of effectiveness.

“We’re not really accomplishing anything,” said one of the hundreds who crowded regularly into the marble halls around the committee’s meeting room, leaving in their wake piles of strewn newspapers, cigarette butts, greasy pizza boxes and empty beverage cans.

“Wait till next year,” said another, referring to his expectation for better results in the Senate.

HOW TAX PLANS COMPARE

INDIVIDUAL TAX TABLES

CURRENT LAW:

Tax rates 11%-50%

Tax brackets (singles) 15 brackets

Tax brackets (couples) 14 brackets

PRESIDENT REAGAN’S PROPOSAL:

Tax rates 15%-35%

Tax brackets (singles) 3 brackets: 15% rate for taxable income from $2,900-$18,000; 25% from $18,000-$42,000; 35% for $42,000 and up

Tax brackets (couples) 3 brackets: 15% rate for $4,000-$29,000; 25% for $29,000--$70,000; 35% for $70,000 and up

WAYS AND MEANS PACKAGE:

Tax rates 15-38%

Tax brackets (singles) 15% rate for taxable income (defined differently than Reagan plan) from $0 to $12,500; 25% from $12,500 to $30,000; 35% from $30,000 to $60,000; 38% for over $60,000

Tax brackets (couples) 15% rate from $0-$22,500; 25% from $22,500 to $43,000; 35% from $43,000 to $100,000; 38% over $100,000 PERSONAL EXEMPTION

CURRENT LAW: Amount $1,080

PRESIDENT REAGAN’S PROPOSAL: Amount $2,000

WAYS AND MEANS PACKAGE: Amount $2,000

STANDARD DEDUCTION (ZERO-BRACKET AMOUNT)

CURRENT LAW:

Singles $2,480

Couples $3,670

Head of households $2,480

Special cases Double expemtion for elderly and disabled

PRESIDENT REAGAN’S PROPOSAL:

Singles $2,900

Couples $4,000

Head of households $3,600

Special cases Repealed

WAYS AND MEANS PACKAGE:

Singles $2,950 standard deduction (effective 1987)

Couples $4,800 standard deduction (effective 1987)

Head of households $4,200 standard deduction (effective 1987)

Special cases Standard deduction would be increased by $600 for the elderly and blind. Itemizers must reduce their deductions by $500 times the number of personal exemptions, in effect reducing their personal exemptions to $1,500

PERSONAL DEDUCTIONS

CURRENT LAW:

Mortgage interest Deductible for principal residence and second home

Other personal Deduction limited to $20,000 ($10,000 for singles)

Charitable contribution Deductible, but contributions non-itemizers ineligible for the first $100 of contributions

State and local taxes Deductible

Two-earner deduction $3,000 max.

PRESIDENT REAGAN’S PROPOSAL:

Mortgage interest Deductible for principal residence

Other personal Deduction limited to $5,000 over investment income

Charitable contributions Deductible only to those who itemize

State and local taxes Not deductible

Two-earner deduction Repealed

WAYS AND MEANS PACKAGE:

Mortgage interest Deductible for principal residence and second home

Other personal Deduction limited to $20,000 ($10,000 for singles)

Charitable contributions Deductible, but non-itemizers ineligible for the first $100 of contributions

State and local taxes Deductible

Two-earner deduction Repealed

RETIREMENT AND FRINGE BENEFITS

CURRENT LAW:

Individual Retirement Accts. $2,000 max. for workers; extra $250 for non-working spouse

Salary set-asides--401(k) Tax deferral for income and employer plans contributions held until retirement

Life insurance interest income Not taxed

Employer-paid health Not taxed insurance premiums

Group life and other fringes Generally not taxed

PRESIDENT REAGAN’S PROPOSAL:

Individual Retirement Accts. $2,000 max. for everyone

Salary set-asides--401(k) Repealed plans

Life insurance interest income Taxed on new policies

Employer-paid health Taxes on first $10 a month for singles, insurance premiums first $25 for families

Group life and other fringes Taxed

WAYS AND MEANS PACKAGE:

Individual Retirement Accts. Same as current law

Salary set-asides--401(k) Max. $7,000 personal contribution, and IRA plans contribution must be reduced dollar-for-dollar

Life insurance interest income Not taxed

Employer-paid health Not taxed insurance premiums

Group life and other fringes Same as current law

OTHER INDIVIDUAL ITEMS

CURRENT LAW:

Earned income credit for $550 max. working poor

Capital gains 60% excluded from taxes: 20% max. tax rate

Dividends $100 exclusion, $200 for couples

Unemployment and disability Disability compensation untaxed and jobless pay taxed if family income exceeds $18,000

Income shifting to children Permitted

PRESIDENT REAGAN’S PROPOSAL:

Earned income credit for $726 max. and indexed working poor

Capital gains 50% excluded: 17.5% max.

Dividends Repealed

Unemployment and disability Both fully taxed

Income shifting to children Curtailed

WAYS AND MEANS PACKAGE:

Earned income credit for $700 max. and indexed working poor

Capital gains 42% excluded; 22% maximum

Dividends Repealed

Unemployment and disability Disability remains untaxed but jobless pay taxed

Income shifting to children Curtailed

BUSINESS TAXES

CURRENT LAW:

Corporate tax rates 46% max.

Dividend payments No deduction

Investment tax credit 6% to 10%

Depreciation of plant and Businesses can write off capital investment equipment in 3 years (cars) to 18 years (real estate)

Business meals and 20% of business meals and entertainment entertainment expenses taxed

“Windfall” tax None

PRESIDENT REAGAN’S PROPOSAL:

Corporate tax rates 33% max.

Dividend payments Deduction for 10% of dividend payouts

Investment tax credit Repealed

Depreciation of plant and Businesses write off inflation-adjusted equipment capital costs in 4 years to 28 years

Business meals and A $25-per-person limit on business meals and entertainment an end to business entertainment deductions

“Windfall” tax 40% of “windfall” benefit from shift to lower tax rates would be taxed

WAYS AND MEANS PACKAGE:

Corporate tax rates 36% max.

Dividend payments 10-year phase-in of 10% dividend deduction

Investment tax credit Repealed

Depreciation of plant and Businesses write off capital costs in 3 years equipment to 30 years; no adjustment unless inflation exceeds 5%

Business meals and 20% of business meals and entertainment entertainment expenses taxed

“Windfall” tax Not taxed