House Approves Tax Revision Bill : Plan Would Transfer $140 Billion From Individuals to Corporations

The House, which last week refused even to consider legislation to overhaul the nation’s tax code, reversed itself Tuesday night and approved the bill, sending it to an uncertain fate next year in the Senate.

The bill, which loosely follows the outlines of an earlier proposal by President Reagan, would reduce the top individual tax rate from 50% to 38%. While some taxpayers would have to pay more, most would come out ahead and the average taxpayer would enjoy a 9% tax cut.

All told, the bill would shift about $140 billion of the nation’s tax burden during the next five years away from individuals and onto corporations.

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), hoisting a glass of champagne after the vote, said: “This toast is to the American taxpayer. They won a big victory tonight.”

‘Historic Step’

And President Reagan, in a statement issued by the White House, declared: “Today, the House of Representatives moved us one historic step closer toward a new tax code for America. We now look to the Senate to move quickly and make all necessary changes to ensure that the final bill is unequivocally pro-family, pro-jobs and pro-growth.”

After a week of wrangling between the White House and House Republicans for enough support to assure the bill’s passage, the issue was decided on a voice vote, leaving no way to determine the margin of victory.

Whether the failure to record individual votes came by design or accident remained unclear. House Speaker Thomas P. (Tip) O’Neill Jr. (D-Mass.) said he was “awed” that no congressman called for a recorded vote when given the opportunity, but he refused to backtrack when outraged GOP congressmen demanded one later.

In the closest measure of sentiment, House Republicans were defeated, 256 to 171, in an effort to send the bill back to the Ways and Means Committee.

Earlier, the House voted 258 to 168 to approve the ground rules for debating the bill, a dramatic turnaround from last Wednesday’s 223-202 vote against the ground rules. A personal lobbying campaign by Reagan helped reverse the outcome.

Most Republicans continued to oppose the measure, even though Reagan had made it his top legislative priority of the year. Of the House’s 182 Republicans, 49 supported the bill in the final recorded test of sentiment--the vote to send the bill back to the committee--more than triple the 14 who supported it last Wednesday.

Before approving the bill basically as written by the Democratic-controlled Ways and Means Committee, the House handily defeated a Republican alternative that would have shifted less of the tax burden from individuals to businesses. The vote was 294 to 133.

Ailing Industries

Republican opponents had contended that the Ways and Means legislation would dampen economic growth and that it did not go far enough in reducing tax rates. Joining them had been Democrats representing states heavily dependent on oil, timber and heavy manufacturing, ailing industries that complained that the tax bill would depress them still further.

Although House Republican leaders remained almost unanimously opposed to the bill, some were persuaded by the White House this week to quit trying to block the measure from reaching a vote.

In return, Reagan promised in a letter to House Republicans that he would veto any bill ultimately passed by Congress that did not assure “increasing incentives for economic growth and jobs, and greater fairness for individual Americans and their families.”

As “the minimum requirements for a tax reform bill I am willing to sign,” Reagan listed a $2,000 personal exemption for all lower- and middle-income taxpayers, “basic tax incentives” for heavy industry, a minimum tax that would prevent individuals and businesses from escaping taxes and a top individual tax rate no higher than 35%.

The Ways and Means bill would levy a 38% maximum rate compared to the current 50%. It would increase the personal exemption, now $1,040, to $2,000 for taxpayers who do not itemize their deductions but only to $1,500 for itemizers. And it would strip business of many of its tax incentives.

No Early Senate Action

The Senate will take its turn with the tax bill next year but key senators have indicated that they probably will not act on it until mid-1986 at the earliest. Senate leaders then would be faced with the unwelcome prospect of drafting their own version of the controversy-ridden measure in an election year in which continued Republican control of the Senate will be at stake.

In the heat of next year’s campaigns, Reagan may have problems finding enough senators who are willing to make the politically risky choices that would produce eventual legislation meeting the standards spelled out in his letter to House Republicans. Rostenkowski said after the House vote that the bill faced “a rocky road in the Senate.”

In addition to Reagan’s pledge to work in the Senate for a bill more to his liking, House Republicans also won a minor victory on a non-binding vote on their demand to delay by a year, to Jan. 1, 1987, the date when the bill would take effect.

Such a delay would assure that “we’re not having job-creation and investment decisions put in limbo” as businesses wait to see how the Senate acts on the measure, Rep. Bill Schuette (R-Mich.) said. He added that his vote had hinged on that concession.

The House made one significant modification of the Ways and Means Committee bill. By a 230-196 vote, it added a tax credit for the first $100 of campaign contributions to House and Senate candidates from the same state as the donor. Existing law, which would have been repealed by the committee bill, allows a credit for half of the first $100 contributed by individuals and the first $200 given by married couples to all candidates for federal, state and local offices.

Reagan’s initial tax plan ignited opposition from a multitude of special interests, and the Ways and Means Committee retreated from many of his specific proposals as it struggled to produce a bill that could command a majority of the 435-member House.

Like Earlier Plan

Despite Republican reservations about the committee’s product, however, its bill is similar in many of its fundamentals to the plan introduced by Reagan last May. Like Reagan’s proposal, it would lower tax rates, widen personal exemptions and reduce average tax burdens for most individuals while increasing taxes on many corporations by curtailing a host of special tax preferences for business investment.

But the Ways and Means Committee also made significant changes in Reagan’s proposal. Rostenkowski agreed to save the existing deduction for state and local taxes, for instance, to pick up support from members representing such high-tax states as New York, California and Michigan. But that required that tax rates could not be as low as Reagan wanted without further aggravating the budget deficit.

The bill would preserve most individual tax preferences, although it would eliminate the two-earner deduction, income averaging and the exclusion for the first $100 in dividend income ($200 for couples).

Tax Breaks Affected

For business, the tax plan would scale back dozens of special tax breaks, including some preferences for such politically powerful industries as oil drilling, real estate, timber and banking.

Like Reagan’s plan, the bill would eliminate the investment tax credit, which provides a refund of up to 10% on most capital investments, and it would reduce the value of depreciation write-offs for business plant and equipment. Under the bill, the entire cost of business meals and entertainment would no longer be fully deductible, with 20% of the cost becoming taxable.

Although tax overhaul has long been a Democratic goal, it required impetus from President Reagan to move it from the dream of political reformers and academic economists to a serious assault on the entrenched power of hundreds of interest groups that benefit from one aspect or another of the current tax code. Nearly two years ago, Reagan vowed in his State of the Union speech to introduce a tax overhaul plan shortly after the 1984 election.

Treasury Plan

Last November, the Treasury Department presented a comprehensive tax revision package that would have eliminated most preferences and aimed for a relatively neutral tax code that treated most investment decisions equally. In May, the White House released its own proposal, which retreated significantly from the Treasury’s plan.

Reagan’s cross-country campaign for tax revision during the summer failed to ignite much public interest, but the bill moved forward in the House largely because Democrats feared that Reagan would accuse them in next year’s election of burying his top domestic program.

Secretary of the Treasury James A. Baker III, charged with shepherding the tax proposal through Congress, decided to work closely with Rostenkowski and relegate House Republicans to a relatively minor role in the drafting of the House bill. Feeling betrayed by the Administration’s support of the committee’s bill, House Republicans launched a surprise raid last week and marshaled enough votes from disaffected Democrats to prevent bringing the bill up for a vote.