Serious Bid to Increase Taxes Seen : Reluctant Reagan May Give Approval if Congress Acts

Despite the best efforts of the President of the United States, the idea of a tax increase refuses to go away.

It might be an oil tax. It might be a “business transfer tax”--in effect, a national sales tax. But whatever it is, Congress seems sure to give serious consideration this year to raising enough new revenue to make at least a dent in the massive federal deficit.

And President Reagan, many believe, is likely to be dragged along--an expectation that has been fed by news leaks from anonymous White House staff members.

Angered by Leaks

Reagan, angered by the leaks, told his staff earlier this month that anyone who thinks he favors a tax increase should resign. To hammer his point home, the President last week vowed once again to veto a tax increase in any form. And Treasury Secretary James A. Baker III, always a sure guide to Reagan’s current stance, said in a recent interview that “the President’s not going to buy off” on higher taxes.

Why, then, do so many members of Congress, even in Reagan’s own Republican Party, insist on pursuing tax options? The answer can be told in two words--”Gramm-Rudman.”

The new federal budget-balancing law, named for its chief sponsors, Sens. Phil Gramm (R-Tex.) and Warren B. Rudman (R-N.H.), sets a $144-billion ceiling on the deficit for fiscal 1987, which begins Oct. 1. That’s $50 billion to $60 billion less than current estimates of the 1987 deficit.

Harsh Terms of Act

Under the harsh terms of the Gramm-Rudman act, indiscriminate spending cuts will wipe out something like 25% of most federal spending programs if Congress and the President cannot agree on a way to reach the $144-billion target some other way. And congressional leaders of widely varying political beliefs are convinced they can’t get there from here without some form of tax increase.

Whether or not they’re right, it pays to be prepared. So dozens of worried lobbyists, political strategists and key lawmakers are scrambling to come up with proposals that would place the burden of any future tax increase on somebody else.

“Everybody anticipates that a tax increase is coming, even if they don’t know when, where or how,” said Norman Ornstein of the American Enterprise Institute, a Washington research organization. “The key question then becomes: Who’s going to be stuck with the bill, or, even worse from a political point of view, who’s going to get the blame?”

Compounding the predicament is the tax overhaul bill passed by the House last year and now pending before the Senate. That bill remains at the top of Reagan’s political agenda because it would slash personal and corporate income tax rates, although it would also take billions of dollars in tax breaks away from all kinds of special interests.

“Until recently, a lot of business groups avoided the issue because they thought tax reform was going to die on the vine,” said Sen. William V. Roth Jr. (R-Del.). “But now that President Reagan has kept it alive, it’s a question of what kind of change we’re going to get. There’s a greater urgency now to considering different options.”

Roth, although he vehemently opposes any overall tax increase, is one of those who have been most active in promoting different tax options. His latest proposal, which has attracted growing support on the tax-writing Senate Finance Committee, is a so-called business transfer tax on consumption. The tax, which would almost surely have the same impact on consumer costs as a national sales tax, could raise huge sums of money--an estimated $114 billion a year at a 10% rate.

Narrowing the Deficit

Roth would use the revenue to pay for reducing today’s personal and corporate income taxes. But his business transfer tax, if altered, could also easily be used to narrow the deficit.

Also under discussion are various energy taxes--most likely a new oil import fee or an increase in the federal gasoline tax.

Some lawmakers are considering the House-approved tax overhaul plan as a vehicle to boost taxes. This could be done, analysts suggest, by immediately eliminating many tax breaks, as the House bill would do, but delaying the House bill’s lower tax rates.

Regardless of their form, the proposed new taxes are being presented as something other than out-and-out tax increases.

Euphemisms for Increase

“Any frankly unambiguous tax increase will be shut down by the White House,” predicted John M. Albertine, head of the American Business Conference, which represents high-growth firms. “That’s why everybody relies on euphemisms like ‘revenue enhancement’ and ‘user fee.’ ”

Bruce Bartlett, former staff director of the congressional Joint Economic Committee and now a leading economist at the conservative Heritage Foundation, said proponents of a tax increase are lobbying behind the scenes.

“What they’re looking for is a way of either tricking Reagan into a tax increase or putting it all together in one package so the President will be left with no choice,” he said. “I’m afraid they will succeed.”

Some proposed tax increases have attracted support for reasons that have nothing to do with reducing the deficit. An oil import fee, for example, would raise relatively little revenue, but members of Congress from such oil states as Texas, Oklahoma and Colorado are pushing hard for one. They know that a $5 to $10 tax on each barrel of imported oil would allow hard-pressed U.S. producers to raise their prices by a similar amount and help bail out some major regional banks stuck with millions of dollars in bad energy loans.

Lobbyists’ Brainchild

Similarly, Roth’s business transfer tax is the brainchild of Washington lobbyists Charls E. Walker and Ernest S. Christian, who have been pursuing the idea of a consumption tax so that the dollars generated from it could be used to preserve tax preferences heavily used by their business clients.

“The business transfer tax will appeal to those business groups that don’t like what’s in the House bill,” said Rep. Bill Gradison (R-Ohio), a member of the House Ways and Means Committee, which wrote the tax revision plan. “There’s not a lot of wiggle room for the (Senate) Finance Committee in the current bill, so I suspect they will try to turn to a consumption-type tax to save their favorite investment incentives.”

To its advocates, the business transfer tax has the advantage of appearing not to fall directly on consumers. Businesses would have to pay the tax at each stage of production and distribution of most goods and services. The tax, otherwise similar to the value-added tax used widely in Europe, would differ in one key respect--it would not be imposed directly on retailers.

Transfer Tax ‘Doable’

“A national sales tax or a VAT would never win approval on the floor,” a top Senate staff member said. “But the BTT--besides its other advantages--is doable because it wouldn’t show up at the cash register.”

Nearly all economists, however, are convinced that a business transfer tax, like a VAT, would be passed on to consumers just as surely as a sales tax.

“The clever idea behind the BTT,” said Joseph J. Minarik, a tax specialist at the Urban Institute in Washington, “is to take a tax on consumers, call it a tax on business and thereby try to make it palatable to voters. But it’s just not true.”

With both the White House and House Democrats likely to maintain their opposition to any broad new consumption tax, the business transfer tax faces a steep uphill fight. Last month, after the Senate proposed a minuscule VAT to finance the Superfund toxic waste cleanup program, Reagan threatened to veto a wide-ranging bill containing the tax, and House members felt so strongly about the issue that hopes for compromise on the overall package collapsed.

“We did demonstrate an unwillingness to accept a VAT as a part of the funding mechanism for Superfund,” a top Administration official said. “If you want to use that as a hint of (our position in the future), I think that would be legitimate.”

And House Ways and Means Chairman Dan Rostenkowski (D-Ill.), warning that even a tiny VAT for toxic wastes would set a bad precedent, argued on the House floor: “Any VAT-like tax is a money machine. This is not the time and this is not the bill to start the country on the road to a national sales tax.”

A Grand Compromise

Many observers are convinced that some type of energy tax is the most likely candidate for a grand budget compromise to head off the automatic, indiscriminate cuts in domestic and military spending that Gramm-Rudman would impose just before the election this fall.

“The conventional wisdom that you can’t pass a tax increase during an election year is no longer valid,” said Paul R. Huard, a vice president of the National Assn. of Manufacturers. He pointed out that Congress approved and Reagan accepted tax hikes in both 1982 and 1984.

Suggesting that lawmakers will approve a “quick and dirty” tax boost, Huard predicted that Congress will turn to a higher gasoline tax as the easiest to implement and relatively painless while oil prices are falling. Raising today’s 9-cent-a-gallon federal tax at the pump by another 12 cents would generate about $10.5 billion in revenues next year, according to the Congressional Budget Office.

Gasoline taxes have traditionally been devoted exclusively to highway and mass transit needs, however, and some lobbyists are convinced that an oil import fee would be a better mechanism for reducing the deficit.

‘Teeny Oil Import Fee’

“You might be able to slip in some teeny oil import fee, maybe $10-billion worth, without arousing the Administration’s opposition,” Albertine said. “It would be the perfect time to do so, with the domestic industry hurting and prices falling.”

A $5-a-barrel tax on imported oil, boosting gasoline prices by an estimated 10 cents a gallon, would raise about $9.5 billion next year.

“There would be strong support for an oil import fee as part of a budget compromise,” said Sen. Nancy Landon Kassebaum (R-Kan.), a member of the Budget Committee, who pointed out that Senate Republicans at one point proposed a budget deal last summer that included a $5 oil import fee.

“There’s has to be a breakthrough,” she added, “because if we have another stalemate, I’m afraid we’re going to end up being regarded as irresponsible and irrelevant.”

Others, though, are skeptical of the possibilities for an oil import fee. For one thing, representatives from the Northeast, which is more dependent than any other region on imported oil, remain adamantly opposed.

North vs. South

“In the past, Congress has always knocked down the oil import tax,” said Larry Kudlow, a former chief economist at the Office of Management and Budget. “I don’t believe the votes are there, because it pits the North versus the South too starkly.”

Indeed, many lawmakers--even those who support a tax increase to avoid drastic spending cuts--acknowledge that the White House may hang tough against any tax increase down to the bitter end. And Congress remains unlikely to proceed unless Reagan at least tacitly opens the door to a tax hike.

“We’ve tried all kinds of different approaches and none of them have worked,” argued Rep. Vic Fazio (D-Sacramento), a Budget Committee member. “You can’t break the gridlock without taxes, and if the President remains locked in concrete, I’m afraid we might not break it with them either.”

FEDERAL TAX BURDEN: A SMALL DECLINE

The federal income and Social Security tax burden for a median-income family of four during the first five years of Ronald Reagan’s presidency:

1981 1982 1983 1984 1985 Income $22,552 $23,614 $24,783 $26,651 $27,984 Income tax 2,418 2,361 2,318 2,447 2,581 Social Security tax 1,500 1,582 1,660 1,786 1,973 Total federal tax 3,918 3,943 3,978 4,233 4,554 As share of income 17.4% 16.7% 16.1% 15.9% 16.3%

Sources: computed from data from Census Bureau, Internal Revenue Service, Social Security Administration.