Leaders Expect Tax Bill to Pass Senate Easily

An ebullient corps of Republican leaders Wednesday forecast easy Senate approval for a far-reaching income tax-overhaul bill that had swept through the Senate Finance Committee in a unanimous post-midnight vote just hours before.

They said the legislation, which would dramatically slice both income tax rates and popular deductions and tax shelters, gained strong momentum after winning an endorsement from President Reagan and all 20 Finance Committee members.

“A couple of weeks ago I said that tax reform was hanging by a thread,” Senate Majority Leader Bob Dole (R-Kan.) said. “But now I can say that tax reform is just about all sewn up.”

Some See Obstacles

But while Dole and Finance Committee Chairman Bob Packwood (R-Ore.) dubbed the bill “unbeatable,” others warned that it must still run a gantlet of lobbying and political opposition on both sides of Congress before tax overhaul can become law.

The first obstacle is a vote scheduled for June by the full Senate. Senate rules allow unlimited amendments, and many Finance Committee members who voted for the bill vowed to be in the vanguard of those who would propose revising it on the Senate floor.

“The Senate floor is a very sensitive area,” said House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), who guided a less sweeping tax measure through the Democratic-led House last fall. While praising Packwood’s bill, Rostenkowski cautioned that “we’ve got to get the President out of the White House for help” if the bill is to survive.

The bill would cut the maximum income tax rate for individuals from 50% to 27%, nearly double the personal exemption and increase the standard deduction. Among the popular tax breaks that it would curtail or kill are those for individual retirement accounts, two-earner families, medical costs, capital gains and a host of tax shelters.

Altogether, individual income tax liabilities would be cut by an average of 6%. Most individuals would pay less than under current law and some 6 million low-income people would be dropped from the tax rolls.

Increases Corporate Taxes

The Finance Committee bill, like the House-passed version, would make up revenue lost to the Treasury because of the individual income tax cuts by increasing corporate income taxes. Although the corporate tax rate would fall from 46% to 33%, corporations would lose a host of tax breaks, including the investment tax credit.

Economists such as Joseph Pechman, a tax expert at Washington’s Brookings Institution, said that the bill would channel billions of dollars that used to be spent on wasteful tax shelters and tax-subsidized investments into economically productive projects.

“It’s true we’re taking back some of the tax breaks that the stodgier industries have,” he said, “but all those in favor of this bill are the progressive industries--the IBMs, the Hewlett-Packards, Silicon Valley.”

Packwood conceded, however, that virtually every special interest will find something in the legislation to dislike. He said that he has been besieged by lobbyists seeking to carve tax-free niches in the bill, not merely for big corporations but for “symphony orchestras, nice things, ballet companies, schools. They all are afraid of the unknown.”

Big Companies May Be Upset

Among the big guns, the real-estate industry, which has erected a glut of office buildings, shopping centers and resorts on tax-shelter foundations, is certain to oppose the bill’s provisions barring taxpayers from deducting tax-shelter losses against other income.

Powerful, profitable companies that have paid little or no federal tax--giants such as General Electric Co. and General Dynamics Corp. among them--may be upset by a new minimum corporate tax of 20% on half their net income.

And some heavy industries that rely on investment tax credits to offset their spending for factory equipment and buildings will be angered by the loss of some $140 billion of those credits.

Finance Committee members are already lining up with amendments designed on behalf of a great range of interests, individual as well as corporate.

Sales Tax Deduction Favored

Among Democrats, New York’s Daniel Patrick Moynihan will seek to reinstate at least part of the popular tax deduction for sales taxes, a big-ticket item that could force a rise in the bill’s 27% maximum personal tax rate or the 33% corporate rate.

Maine’s George J. Mitchell wants a third, 35% tax bracket for the very wealthy, a clause that could not only drain GOP support for the bill but tap new money to finance new loopholes. Russell B. Long of Louisiana, despite calling the bill “good for the country,” said he was “not completely satisfied that this bill will encourage business investment.”

Among Republicans, John Heinz of Pennsylvania dislikes the bill’s narrowing of tax deductibility for IRAs. William Armstrong of Colorado warned that he may seek to reopen some tax-shelter benefits for the real estate business.

Packwood insisted that the enormous range of opposition demonstrated the bill’s strength--the fact that it would take an evenhanded slap at everyone’s tax havens.

Expects Business Support

“The coalition we’ll have going for this will be extraordinary and unusual,” he said. “They’re going to be lobbying against any, any significant change. . . . I think we’ll have an incredible aggregation of business support for this bill.”

The legislation does indeed enjoy backing from many industries, led by service and light-manufacturing businesses that do not benefit significantly from current law’s huge tax breaks for construction and equipment purchases.

But David T. Wright, tax services director for the accounting firm of Coopers & Lybrand, disputed the widely stated view that the bill would encourage business activity and investment. Wealthy investors might be less willing to finance risky ventures, he said, because they could not easily deduct their losses.

Some economists voiced similar concerns, although they applauded the bill’s lowering of tax rates.

Doubts Savings Disincentives

“It hits savings and investment particularly hard by eliminating the capital gains differential, the deduction for IRAs, the limits on contributions to 401(k)” retirement savings plans, said Stanford University economist Michael J. Boskin. “In a society that has a very low savings rate . . . that seems the most unreasonable thing they did.”

Supply-side economists, the staunchest supporters of the tax cuts enacted by Congress in 1981, predicted increases in both savings rates and investment as a result of the Finance Committee bill’s reduction in tax rates.

OVERHAULING THE TAX CODE: THE LATEST PROPOSAL

The provisions of the tax bill approved early Wednesday by the Senate Finance Committee, compared with current law and the bill passed by the House last December.

PROVISIONS THAT WOULD LOWER TAX BURDEN Tax Rates Finance Committee bill -15% on first $29,300 of taxable income ($17,600) for singles -27% on additional income. -High-income taxpayers ($75,000 for couples, $45,000 for singles) would pay 27% on some or all of the first bracket. Current law -Brackets range from 11% to 50% -Top rate applies to income above $171,600 for couples, $85,000 for singles. House bill -Four brackets: 15%,25%, 35% and 38%. -Top rate applies to income above $100,000 for couples, $60,000 for singles. Personal exemption Finance Committee bill -$1,900 next year, $2,000 thereafter. -Phased out for couples above $145,320 in income and singles above $87,240 Current law -$1,080. House bill -$2,000 for taxpayers who do not itemize their deductions. -$1,500 for taxpayers who itemize. Standard deduction Finance Committee bill -$5,000 for couples, $3,000 for singles. Current law -$3,670 and $2,480. House bill -$4,800 and $2,950. TAX BREAKS THAT WOULD BE LOST OR MODIFIED State and local tax payments Finance Committee bill -Sales tax deduction killed. -Income and property tax deduction preserved. Current law -All tax payments deductible. House bill -All tax payments deductible. Interest costs Finance Committee bill -Mortgage interest deductible on two homes. -Consumer interest not deductible. -Investment interest deductible only if it offsets investment income. Current law -All interest costs deductible. House bill -Mortage interest deductible for two homes. -Additional interest deduction limited to $20,000 ($10,000 for singles) Individual RetirementAccounts Finance Committee bill -Contributions deductible only for workers without employer pension plans. -Earnings deductible for everyone. Current law -Contributions ($2,000 for workers, $250 for spouses) and earnings deductible. House bill -Contributions reduced by amount of 401(k) contributions. 401(k) retirement plans Finance Committee bill -Employee contribution limited to $7,000. Current law -$30,000 limit. House bill -$7,000 limit. Two-earner deduction Finance Committee bill -Repealed. Current law -10% of first $30,000 of spouse’s income. House bill -Repealed. Medical deduction Finance Committee bill -Deductible beyond 10% of income. Current law -Deductible beyond 5% of income. House bill -Deductible beyond 5% of income. Charitable contributions Finance Committee bill -Deductible for itemizers only. Current law -Deductible for all taxpayers. House bill -Contributions beyond $100 deductible for non-itemizers Capital gains Finance Committee bill -Fully taxed; 27% maximum tax rate. Current law -40% taxed; 20% maximum tax rate. House bill -58% taxed; 22.04% maximum tax rate. Income averaging Finance Committee bill -Repealed. Current law -Allowed. House bill -Repealed. Meals and entertainment Finance Committee bill -80% deductible. Current law -Fully deductible. House bill -80% deductible. Dividends Finance Committee bill -Fully taxable. Current law -First $200 ($100 for singles) excluded. House bill -Fully taxable. Tax shelters Finance Committee bill -Losses from “passive investments” not deductible. Current law -Many shelters deductible. House bill -Deductions limited. BUSINESS TAX CHANGE Investment Tax Credit Tax rate at 33% -Repealed Tax rate at 46% -10% of investment costs Tax rate at 36% -Repealed Depreciation Tax rate at 33% -Current schedules liberalized Tax rate at 46% -Deductions offset declining value of equipment and property Tax rate at 36% -Current schedules tightened Minimun Tax Tax rate at 33% -Substantially tightened Tax rate at 46% -Allows any firms to escape taxes Tax rate at 36% -Somewhat Tightened Oiland Gas Tax rate at 33% -Most tax benefits preserved Tax rate at 46% -Controversial tax breaks allowed Tax rate at 36% -Most tax breaks preserved Timber Tax rate at 33% -Some tax benefits preserved Tax rate at 46% -Controversial tax breaks allowed Tax rate at 36% -Many tax breaks repealed Source: Senate Finance Committee