Senate Finance Committee Chairman Bob Packwood (R-Ore.) unveiled a draft tax revision proposal Thursday that is designed to reduce income taxes for the average taxpayer by slightly more than 8%.
However, the plan would lead to steep tax hikes on such popular consumer items as beer, wine, cigarettes, telephone calls, gasoline and airline tickets.
The proposal meets President Reagan's goal of slashing the top personal tax rate to 35% from the current 50% and nearly doubling the personal exemption to $2,000 for the vast majority of individuals. By raising corporate taxes, it would meet Reagan's objective of neither increasing nor decreasing the overall tax burden.
"The President is on board," Packwood said. "He supports this bill. I am delighted."
But his own Finance Committee is not entirely on board.
"The good news is that, on balance, the proposal is not nearly as bad . . . as the House-passed bill," said Sen. David L. Boren (D-Okla.). "The bad news is that it is still worse than current law and it will tend to hurt America's ability to compete in world markets. Many more changes need to be made in this bill."
Packwood's package, many of whose key provisions already had been disclosed, is likely to be substantially altered when it goes to the committee next week and the full Senate later this year. And, if the Senate, where there is considerable opposition to tax overhaul, approves a bill, a compromise then will have to be reached with the version passed by the House last December.
Some Finance Committee members objected to Packwood's proposal to increase excise taxes on many consumer goods and services, which fall disproportionately on lower-income groups. The revenue from the excise taxes enabled Packwood to provide a lower top individual income tax rate and less punishing business tax increases than the House bill, but critics in his committee called excise taxes the wrong way to achieve that goal.
"I don't think it will be fair to increase excise taxes to reduce income taxes," Sen. George J. Mitchell (D-Me.) said. He argued that it is "raising taxes on the bottom 90% of the income scale to reduce the taxes for the top 10%."
Although individuals would receive an overall income tax cut estimated at about $184 billion over five years, excise taxes on consumers would rise directly by $13 billion. Beyond that, businesses would probably pass on to consumers nearly all of the $62 billion in additional income taxes that they would pay because of the proposed elimination of the business deduction for excise tax payments.
50% Rise in Excise Taxes
Under the proposal, a Finance Committee staff member estimated, overall excise taxes would be expected to rise by more than half. "It's a backdoor approach to raising consumption taxes," he said.
Most excise taxes are relatively small, but they add about 8% to gasoline prices, 16.4% to the price of cigarettes and 28.5% to the price of hard liquor. The 17-cents-a-gallon tax on wine, which would be increased almost fourfold under Packwood's proposal, now adds about 1.6% to the price of wine, according to industry analysts, and beer taxes raise prices by about 5.5%.
In contrast to the House bill, which would make many of the tax provisions retroactive to the beginning of this year, most of the tax changes in Packwood's proposal would not take effect until next Jan. 1. However, the investment tax credit for businesses would be eliminated as of March 1, 1986.
Packwood's plan follows the general outlines of Reagan's original tax revision package and the House-passed bill. Packwood predicted that a bill acceptable to both the House and Senate could be on Reagan's desk by Aug. 15, but most lawmakers say they believe that is far too optimistic.
Over five years, the tax plan would shift at least $110 billion in federal taxes from individuals to corporations.
For individuals, the current multiplicity of personal tax brackets, ranging from 11% to 50%, would be reduced to just three rates--15%, 25% and 35%. Although subject to revision, the top tax rate of 35% is expected to apply to those with taxable incomes above $57,000 for couples and $35,000 for single persons.
The personal income tax exemption, $1,040 for the 1985 tax year and $1,080 in 1986, would become $2,000 for taxpayers with adjusted gross incomes below $100,000 and be phased down to zero for those earning more than $200,000. The standard deduction would be raised significantly, but the exact figure has not been set.
The deduction for mortgage interest payments on a principal residence and a second home, as well as the real estate property tax deduction, would be retained for all taxpayers. Charitable deductions also would be preserved in full.
But taxpayers in the top 35% tax bracket would not receive the full value of any of the other deductions, including those for state and local income taxes. And the deductions for state and local personal property and sales taxes, which the House-passed bill preserved, would be eliminated under the Packwood proposal.
Like the House bill, the proposal would eliminate income averaging and the special deduction for two wage-earner households and would avoid any additional taxation of employer-paid fringe benefits.
The top rate for corporations would be cut to 35% from the current 46%, and many specific tax preferences for businesses would be reduced. Although elimination of the investment tax credit would end the largest single business tax break, other write-offs for investments in new plant and equipment would be expanded.