Panel Favors His Tax Plans, Packwood Says : Proposals Would Reduce Top Rate to 27%, Curb Shelters, Repeal State Sales Levy Deductions

A majority of the Senate Finance Committee now appears to favor a radical overhaul of the federal income tax code that would slash the maximum personal tax rate to 27% and wipe out a host of tax shelters that largely benefit the wealthy, committee Chairman Bob Packwood (R-Ore.) said Friday.

Packwood’s plans would eliminate the deduction for state and local sales taxes, although income and real estate taxes would remain deductible. But it would also nearly double the personal exemption, and committee aides said that tax payments would decline on average for taxpayers in all income brackets.

In a news conference after a week of closed Finance Committee sessions, Packwood said that his proposal would relieve taxpayers of “the extraordinary influence of a tax code that tugs and pulls them in all directions.”

“I hope there’s a (committee) majority for it,” he said. “I hope the public will regard it as genuine tax reform, because it is simplicity, it does remove tax deductions.”

While Packwood claimed backing from a majority of the 20-member Finance Committee, however, he declined to list all of those supporters. And committee aides conceded that preserving that support could prove difficult.

As described by committee aides, the plan would redistribute massive amounts of wealth to middle- and lower-income taxpayers--at least $140 billion over five years--by dismantling most personal tax shelters and shifting $93 billion to $103 billion of the personal tax burden from individuals to businesses.

Committee aides said that Packwood’s goal is to remove an additional 6 million of the poorest Americans from the tax rolls.

His plan appears far closer to the concept of “tax reform” first touted by the White House--sharply reduced tax rates and fewer tax dodges--than either President Reagan’s formal proposal of last summer or the version passed by the Democratic-led House last fall.

The proposal would condense today’s multiplicity of personal tax brackets into just two. Families of four would pay a 15% tax rate on approximately their first $28,500 of taxable income, Packwood said, and 27% on the rest. He did not say where the 15% rate would give way to the 27% rate for individual taxpayers.

And Packwood’s proposal would vastly simplify the current tax code by eliminating a great many of the deductions now allowed for taxpayers who itemize expenses.

Besides ending the deduction for state and local sales taxes, the plan would curb the use of deductions for individual retirement accounts, interest payments and medical expenses. It would retain the deduction for nearly all mortgage payments. Over five years, it would collect $50 billion to $60 billion in taxes now avoided by individuals who invest in tax shelters and other “passive” ventures.

Many wealthy persons who have escaped tax liability would be captured by a new minimum tax of undetermined size, although some could continue to escape the liability by investing in municipal bonds, which would keep their fully tax-free status under Packwood’s plan.

Business Rate Cut to 33%

The maximum corporate tax rate also would be cut deeply, from the current 46% to 33%. But that reduction, costing a whopping $127 billion over five years, would be financed by ending business’ investment tax credit as of March 1.

The accelerated depreciation system that business has enjoyed since 1981 would be not only retained but made more generous, by $13 billion to $17 billion over five years.

But business would be hit by a variety of other provisions designed to offset the loss of revenue from the personal tax cuts and to allow the government to continue raising as much income tax revenue as the current system provides. Committee aides plan to select items from a grab bag of possible measures this weekend and clear them with Finance Committee members by telephone.

A senior aide said that $50 billion or more could be raised over five years through changes in corporate tax accounting rules, another $10 billion by taxes on insurance, $20 billion from a new 20% minimum tax on corporate income and $12 billion from changes in the corporate and individual deductions for business entertainment.

Bolstering Compliance

Under Packwood’s plan, another $11 billion in new revenue would be raised by boosting sagging compliance with the tax laws, apparently by beefing up the Internal Revenue Service’s corps of auditors and agents.

Unlike earlier versions of the tax plan floated this week, Packwood’s proposal includes no new excise taxes on such items as liquor and cigarettes. Packwood had suggested raising $25 billion over five years through such taxes, but aides said that the unpopular levies would be shunned unless it was impossible to raise the needed money elsewhere.

Sen. George J. Mitchell (D-Me.), one of six Finance Committee members--three Democrats and three Republicans--who appeared with Packwood on Friday, later called the plan “a breakthrough in terms of moving all this forward.”

But even Mitchell voiced reservations about parts of the plan, saying he intends to propose a new, higher tax bracket for wealthy individuals to make the proposal’s tax rates more progressive.

Dole Supports Plan

A spokesman said that Senate Majority Leader Bob Dole (R-Kan.) supports the Packwood plan “in principle” but questions some provisions. Earlier this week, Treasury Secretary James A. Baker III offered similar but more vague backing for the Finance Committee’s efforts.

Committee aides said the panel will meet publicly next week to vote on details of the proposal, most of which will be put in writing this weekend. A senior aide said the legislation could be approved by the panel by the middle of next week but declined to predict when the full Senate might vote on it.

THE NEWEST TAX BILL

The provisions of the tax overhaul bill proposed by Senate Finance Committee Chairman Bob Packwood (R-Ore.), compared with current law and the bill passed by the House last year.

Packwood bill Current law Tax brackets two 14-15 Tax rates 15%, 27% 11%-50% Personal exemption $1,925 next year, then $2,000; $1,080 this year phased out for taxpayers earning more than$150,000 Standard deduction About $5,000 for $3,670 for joint (zero-bracket amount) joint returns returns Mortgage interest Deductible for Deductible first two homes Other interest costs Deductible only if they Deductible offset interest income State and local taxes Sales taxes no longer Deductible deductible Inividual Retirement Deductible only for persons Deductible up to Accounts without other pensions $2,000 a year 401(k) retirement $12,000 limit on $30,000 limit plans annual contribution Charitable Deductible for Deductible contributions itemizers only Medical expenses Deductible beyond Deductible beyond 10% of income 5% of income Capital gains Taxed like other 20% maximum rate income income

House bill Tax brackets four Tax rates 15%, 25%, 35%, 38% Personal exemption $1,500 for itemizers, $2,000 for non- itemizers Standard deduction $4,800 for joint (zero-bracket amount) returns Mortgage interest Deductible for first two homes Other interest costs Deductible up to $20,000 State and local taxes Deductible Inividual Retirement $2,000 limit, reduced Accounts by amount of 401(k) contributions 401(k) retirement $7,000 plans Charitable Deductible in contributions excess of $100 Medical expenses Deductible beyond 5% of income Capital gains 22.04% maximum rate income

Source: Senate Finance Committee