Tax Panel Thwarts Revision Moves : Senate Reform Advocates Outvoted at Almost Every Turn

When Sen. Bill Bradley (D-N.J.) proposed earlier this month that the Senate Finance Committee vote to reduce tax breaks for the timber industry, committee Chairman Bob Packwood (R-Ore.), a dogged defender of Oregon’s timber interests, quipped: “That’s out of order.”

It might as well have been. Bradley, challenging Packwood on his home turf, got one vote for the amendment--his own.

Bradley, the former basketball player, Rhodes scholar and potential Democratic presidential candidate, is one of a handful of political leaders who have pursued the dream of reducing tax rates and weeding the tax code of many of its breaks for special interests. Now that the Finance Committee is finally taking up the major tax overhaul bill proposed last year by President Reagan and approved by the House, this should have been his finest hour.

Outvoted, Outmaneuvered

Instead, Bradley and the committee’s few other advocates of major tax revision have been outvoted and outmaneuvered at almost every turn. In reality, they are drastically out of step with the pro-business orientation of the tax-writing committee.

Nearly all 20 members of the committee, rather than limiting special tax breaks, have worked to protect local industries, favored constituency groups and large campaign contributors from the impact of tax overhaul.

“The Senate Finance Committee is definitely not pursuing the goal of fundamental tax reform,” said Charles E. McLure Jr., a senior fellow at the Hoover Institution in Palo Alto, Calif. As a top official at the Treasury Department, he helped draft the Administration’s original tax proposal. “The only principle is political expediency, and that favors the special interests over the public interest.”

The House-passed bill, by contrast, would take at least some halting steps toward simplifying the tax code, and the House would almost surely reject the Finance Committee’s version of tax overhaul. Unless the Finance Committee reverses course, blending the two approaches into a final piece of legislation could prove impossible.

Preserving Tax Breaks

Since the Finance Committee, working from a draft prepared by Packwood, began writing its own tax bill last month, nearly every decision has gone in favor of preserving existing tax breaks rather than eliminating them. In several cases, the panel has actually expanded current tax preferences.

Packwood was forced to cancel a committee meeting scheduled for last Friday to avoid defeat on his proposal to trim deductions for state taxes and business meal expenses. Vowing to continue drafting a bill, Packwood said he will move the committee into private negotiations this week in an effort to negotiate an acceptable compromise.

The beneficiaries of committee decisions to date vary from relatively broad groups such as heavy industry, home builders and owners of employer-paid life insurance policies to such specific targets as Florida orange growers, Southwestern oil drillers and refiners, Northwestern logging firms and Rocky Mountain irrigators. One of the few proposals that was rejected was a plea to provide more generous tax write-offs to tuxedo rental firms.

Investment Costs

Committee members have defended a host of current tax preferences on the ground that they help hold down investment costs for U.S. firms and boost the nation’s ability to compete economically overseas.

The “selective provision of tax benefits in one way or another is inescapable,” Deputy Treasury Secretary Richard G. Darman, who supports most of the committee’s actions, told the panel during one of its drafting sessions. The committee’s operating principle, he said, is the “enhancement of U.S. competitiveness in the international marketplace.”

That is not the way the scattered “reformers” on the committee view it.

Sen. Daniel Patrick Moynihan (D-N.Y.), who unsuccessfully challenged a proposal by Sen. William V. Roth Jr. (R-Del.) to boost write-offs for struggling manufacturing industries at the expense of fast-growing service firms, termed the plan a “19th-Century industrial policy.” The proposal would separate the industrial winners from the losers, Moynihan said, “and then you bet on the losers.”

High-Risk Strategy

Sen. George J. Mitchell (D-Me.), railing against the committee’s plan to single out dozens of specific investments for better tax treatment, pointed out that the proposal would favor trucks carrying baseball gloves over those hauling hamburger buns. Moynihan complained that the proposal’s long list of “productivity property,” which would receive generous tax benefits, was chosen based “on what state you came from.”

The outnumbered advocates of tax revision have fallen back on a high-risk strategy that, they acknowledge, could derail the whole tax overhaul process in the Senate. “There’s a danger that in trying to save tax reform,” said Sen. John H. Chafee (R-R.I.), “we may end up killing it.”

Chafee, along with many of the strongest and earliest supporters of overhauling the tax code, wants to knock out the key prop holding up Packwood’s rickety tax proposal: an ingenious plan to raise $62 billion over five years by eliminating the corporate income tax deduction for excise taxes levied on such firms as tobacco manufacturers, oil companies, liquor distillers, airlines and long-distance telephone companies.

Loss of $29 Billion

Without the excise tax changes, the Finance Committee’s tax package would widen the federal budget deficit dramatically at a time when all parties agree that it must produce the same amount of revenue as the current tax law if it is to be passed. Even with the deduction eliminated, the committee has already approved provisions that would lose about $29 billion over five years.

Robert McIntyre, tax policy director of Citizens for Tax Justice, a labor-backed advocate of tax reform, said he hopes that eliminating the excise tax provisions would “force the committee to face up to the fact that they have to go back and take on the loopholes.”

Economists believe wiping out the excise tax deduction would boost prices as much as 50% on most products subject to excise taxes, with the burden falling most heavily on lower- and middle-income consumers. And if cigarette manufacturers and liquor companies, for example, could not pass along their higher tax payments to consumers, they fear that their profits would be squeezed.

‘Strange Bedfellows’

A “strange bedfellows” alliance between ardent tax reformers and the tobacco and liquor industries has developed to lobby against the excise tax proposal. “I’m glad I don’t have to work for these guys,” McIntyre said. “But as long as we’re on the same side, that’s great.”

So far, however, the reformers on the committee have failed to hold back the flood of decisions to keep existing tax preferences intact.

Bradley, for one, has been particularly ineffective. At one point in the debate, for example, he spent several minutes complaining about a provision that would have expanded Individual Retirement Accounts for non-working spouses. Only later did he learn that the provision was not in the working draft of the bill.

Moynihan frequently launches into rhetorical flourishes but has admitted that he did not always know what was going on in backroom discussions open to all committee members.

Special-Interest Groups

By contrast, many of the other members, such as Sen. Lloyd Bentsen (D-Tex.) and Sen. Dave Durenberger (R-Minn.), are generally well-informed about the details of the proposal. They have worked diligently to put together amendments that protect important special-interest groups--the oil industry in Bentsen’s case, local governments and developers that depend on tax-free municipal bonds in Durenberger’s.

Chafee, after being on the losing side of one costly vote after another to retain existing tax preferences, has begun to wonder if he should abandon the cause. Last week, when he finally proposed a relatively trivial amendment that would preserve a deduction on estate taxes, Packwood complained: “Losing money is a big issue.”

“Well,” Chafee replied facetiously, “it hasn’t seemed to slow anybody else down.

“I’m at the point where if you can’t beat them, join them. And it’s a large crowd to join.”