Senate Unlikely to ‘Improve’ House Measure, Leaders Say : Republicans Fear Reagan Betrayal on Tax Bill

President Reagan’s hopes for “improving” the House-passed tax overhaul bill in the Republican-controlled Senate are likely to be dashed next year, Senate leaders said Wednesday, because GOP lawmakers remain worried that the White House would betray them in a showdown with the Democratic-led House over which tax breaks to eliminate.

Few senators, for example, would be willing to go out on a limb and vote to wipe out the state and local tax deduction, Senate Finance Committee Chairman Bob Packwood (R-Ore.) argued. They fear that Reagan ultimately would accept the House position retaining the deduction, he said, leaving the Senate “hung out to dry.”

Changes Unlikely

And, unless the state tax deduction is curtailed, Packwood noted, it would be practically impossible to make fundamental changes in the House tax package.

Citing Reagan’s abandonment earlier this year of Senate Republicans who favored trimming Social Security benefit increases to help cut federal deficits, Packwood said: “Every one of the Senate Republicans remembers . . . the President being with them and then leaving them. And they’re not about to go down that road again.”

Reagan, in a letter to House Republicans that helped turn around enough GOP votes to assure House approval Tuesday of his top domestic priority, vowed to veto any tax bill that did not meet his goals. Those goals include a top personal tax rate of no higher than 35%, a near-doubling of the personal exemption to $2,000 for all lower- and middle-income taxpayers and continued tax incentives for basic industry.

Letter Dismissed

But senators generally dismissed Reagan’s letter as an ineffective threat that would have little bearing on the tax battles ahead.

“Those are lofty goals,” mused Senate Majority Leader Bob Dole (R-Kan.), who said he was not consulted on the letter and implied that the Senate would not feel bound by it.

And Sen. Max Baucus (D-Mont.), a member of the tax-writing Finance Committee, suggested that Reagan’s promise would be long forgotten by the time the Senate begins drafting its own version of the tax bill.

“In politics, a week is a long time,” he said. “I can’t see how the President will get everything he wants.”

As a result, lawmakers generally agree, any bill that emerges from the Senate is likely to resemble the House version of tax revision.

“You could play around the edges of the bill,” Packwood said, adding later: “I think we will pass a bill not unlike the House bill.”

House Speaker Thomas P. (Tip) O’Neill Jr. (D-Mass.) agreed, saying: “I doubt (a Senate bill) will be that different in substance.”

However, it is just as likely that the Senate will fail to accept any tax revision plan--particularly because many members of the Senate prefer the current tax code, with its numerous tax incentives for business, over the House proposal to slash tax breaks for corporations and wealthy investors and provide tax cuts for most individuals.

Uphill Battle

“The House bill is a dramatic improvement over the President’s plan,” said Sen. George J. Mitchell (D-Me.), “but it will be an uphill battle because of the strong opposition in the Senate to tampering with corporate tax incentives.”

Complicating the situation is the fact that many senators privately favor trying to prevent Reagan from extracting his tax revision measure from the Senate unless he is willing to accept a separate tax increase as part of the deficit-cutting requirements of the Gramm-Rudman budget-balancing act.

“Gramm-Rudman creates a whole new situation,” said California Sen. Alan Cranston, the second-ranking Democrat in the Senate. “My feeling is that tax reform is going to turn into a revenue-enhancing measure.”

Without a tax increase, Cranston added, “I don’t know anybody up here who sees where we can make the cuts required.”

Although Packwood continued to insist that Congress would not propose a tax increase unless Reagan fully supported it, other senators are toying with various ideas for raising revenues.

Gaining increasing support in the Senate is the idea of imposing a new type of consumption tax, probably in the form of a value-added tax such as those widely used in Europe. Under such a levy, which is similar to a sales tax in its effect, taxes are imposed on goods and services at each stage of the production and distribution process.

The leading proposal, which is backed by various business lobbyists who want to preserve existing tax breaks, is the so-called business transfer tax suggested by Sen. William V. Roth Jr. (R-Del.) as a major new revenue source. The tax would fall heaviest on importers, because domestic manufacturers would be allowed a rebate on their payroll taxes to compensate for the business transfer tax.

Dole Reluctant

But Dole, the most important influence in the Senate on tax policy, remains reluctant to embrace the Roth proposal, primarily because such a tax could be a political nightmare, raising prices for all consumers and hitting lower-income groups hardest.

Another possibility, advocated by Packwood and lawmakers representing the oil-producing states of the Southwest, is an oil-import fee. But representatives from the Northeast and Midwest remain opposed to any tax that would zero in on their constituents, because those areas are particularly dependent on imported oil.