Once-Endangered Tax Bill Now Seems to Be Invincible

For months and months, when Senate Republican leader Bob Dole returned home for town meetings with constituents, nobody in the entire state of Kansas seemed to care about tax revision. Dole always had to raise the issue himself.

Then the Senate Finance Committee unanimously approved a far-reaching tax overhaul plan that would slash the maximum personal tax rate from 50% to 27%. Now, says Dole, it seems as if everybody in Kansas wants to talk about tax revision--with most of them urging support for the Senate bill.

And the story of that 180-degree turnaround represents the political upset of the year, because it is not just Kansas that has flipped.

Historically, tax revision has been an orphan--an idea championed by academic theorists and a few idealists who could never match the political muscle of the well-heeled lobbyists who riddled the tax code with loopholes and preferences for special interests. Accordingly, as the Senate Finance Committee toiled through the winter and spring, most of Washington’s smart money said nothing would ever come of it.

Now, however, with the full Senate scheduled to begin debate on the Finance Committee’s bill Wednesday, a major overhaul of the nation’s tax laws--a revision fairly close to the committee’s blueprint--is suddenly considered almost inevitable.

“I would have said a month ago there were virtually no prospects for a tax bill this year,” said Rep. Dick Cheney (R-Wyo.), chairman of the Republican Policy Committee. “But now most would argue that you can expect to have a tax bill on the President’s desk by some time in September.”

“We’ll have a tax bill this year,” William L. Ball III, President Reagan’s assistant for legislative affairs, confidently agreed.

What accounts for this dramatic change? Why is Congress poised to actually do something it normally will not even consider?

Several factors seem to be at work:

--The 27% maximum personal tax rate, carrying with it the prospect of an average 6% tax cut for all Americans, has broad popular appeal.

--For senators and congressmen up for reelection in November, boasting about tax overhaul is far more appealing than talking about such unpalatable subjects as their inability to work dramatic reductions in the still-massive federal budget deficit.

Business Support

--The business community, faced with a House-passed tax bill that is even less palatable, has given the Senate bill surprisingly broad support.

--A formidable political coalition is backing the Senate bill, led by President Reagan, who has made tax overhaul the top legislative goal of his second term, and Finance Committee Chairman Bob Packwood (R-Ore.), who wrote the bill that will soon be on the Senate floor.

--The dawning of the age of television on the Senate floor, coinciding as it will with the tax debate, has added to the attraction of being seen doing something about the loophole-encrusted tax code.

To be sure, some provisions of the Finance Committee bill--notably the sharp curtailment of individual retirement accounts--face fierce opposition, and the danger looms that minor tinkering could unravel the whole thing because the bill represents an intricately crafted compromise.

Sen. John C. Danforth (R-Mo.), a senior member of the Finance Committee, said the bill is “very vulnerable to being picked apart.”

To Resist Changes

Yet the Reagan Administration, which originally advocated reducing personal tax rates to three brackets of 35%-25%-15%, and Packwood have vowed to resist any and all changes.

“The cornerstone of our strategy is to get the bill into conference committee without any major amendments,” said a White House senior aide who asked not to be identified. “There’s a threat that a collection of forces could start dismembering the bill, but if the core group of senators supporting it can hold together--and I think they can--we’ve got a good chance of going to conference with it fundamentally intact.”

A conference committee of House and Senate members will have to blend any bill that passes the Senate with the tax overhaul blueprint passed by the House last December. Although House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) has insisted changes must be made in the Senate version, he also says the differences between the two bills “can be ironed out.”

Even Rostenkowski may have difficulty resisting the Senate bill’s momentum. The measure would not only slash the top personal tax rate from 50% to 27% but also reduce the maximum corporate rate from 46% to 33%.

“The magic of that 27% rate is real,” said a prominent tax lobbyist who opposes the bill. “Dropping the top rate to 38% like the House bill does is kind of like kissing your sister, but 27% breaks through with real passion. The Senate bill’s not politically unassailable, but it’s close to it.”

Shift Tax Burden

To prevent those rate reductions from pulling down federal revenues and thus aggravating the deficit, the Senate bill would curtail a host of individual and corporate tax breaks and shift a substantial share of the tax burden from individuals to businesses, but corporate America appears to regard the Senate formula as something it can live with.

Lee Atwater, chairman of Vice President George Bush’s political action committee, predicted that tax revision will be “the hottest issue” in this November’s congressional elections. “The average American can reach out and touch this tax reform measure and feel it affect his life,” Atwater said. “And anything that does that is a guaranteed winner with voters.”

Tax overhaul has a special political appeal to Republicans. The Senate bill, which would remove 6 million poor people from the tax roles at the same time that it deprived the wealthy of many of their tax shelters, would address one of the most widespread criticisms of Reagan’s first term--that his combination of tax cuts and budget reductions helped the wealthy while hurting the poor.

The bill would shift $100 billion of the federal tax burden from individuals to businesses over five years. Bad as that might seem to corporate lobbyists, it is not as bad as the House-passed bill, which would hit business with an extra $140 billion in taxes. So with some exceptions, most notably the real estate industry, business is lining up behind the Senate bill as the lesser of evils.

By publicly supporting a tax revision measure with which they do not fully agree, businesses hope to retain some leverage in seeking changes when the measure goes to a conference committee.

Television Coverage

If business or any other special interest hopes to obtain favors from the Senate, they will have to get them in full view of the public. By coincidence, television cameras will be permitted on the Senate floor today for the first time ever. Thus, senators who seek to insert new tax breaks for corporations or wealthy Americans will have to do so under the glare of enhanced public scrutiny.

Further, advocates of changes in the committee bill may have to contend with a rule sought by Senate leaders that would require any amendments to raise as much tax revenue as they would lose.

Thus Sen. Alfonse M. D’Amato (R-N.Y.) and at least four other senators will be under extra pressure as they oppose the Finance Committee provision abolishing the tax-deductible IRA contribution for individuals covered by pension plans at work. The committee provision is worth an estimated $25.5 billion in higher revenues for the Treasury over five years. To offset that loss, D’Amato and others have suggested suspending another provision of the tax code--the one providing for tax brackets to expand with the cost of living so that inflation-driven pay increases do not drive taxpayers into higher tax brackets.

If Packwood and his allies can defeat the amendment to restore full tax deductibility for popular IRAs, that might signal that the Finance Committee bill is invulnerable on the Senate floor. On the other hand, the success of the IRA amendment might open the way to further tampering.

And additional proposals are in the wings. Sens. Alan Cranston (D-Calif.) and Rudy Boschwitz (R-Minn.) want to reduce the tax on capital gains, which are profits from the sale of investments held for at least six months. The Finance Committee would tax capital gains like other income, for a maximum tax rate of 27%. Special provisions of current law set a top rate of 20%, and Cranston and Boschwitz are looking at top rates between 16% and 20%.

Attacks From Zschau

Cranston’s goal, according to a Finance Committee staff member, is to protect himself from Republican attacks, especially from Rep. Ed Zschau (R-Los Altos), a leading candidate for the Republican nomination to oppose Cranston’s reelection bid in November. Zschau, representing Silicon Valley, was a key advocate in 1978 and 1981 of lower capital gains rates as a spur to investment in high-technology companies.

Another provision of the Finance Committee bill that might be vulnerable to amendment is the elimination of deductions for state and local sales tax payments.

But any such changes would almost certainly have to be accompanied by offsetting revenue increases because all agree that tax overhaul must not make the federal deficit worse. Among the likeliest targets are special tax breaks for the oil and gas and timber industries, which the Finance Committee would largely preserve.

Maximum Tax Rate

Another possibility--a politically explosive one--is to increase the bill’s maximum tax rates, although “it will be a little difficult to go on the tube in front of millions of Americans and argue that tax rates should be raised,” said a senior White House official who asked not to be named.

The pressure is more likely to fall on the corporate rate than the personal rate.

“Whether the corporate rate remains at 33% or goes to 35% remains to be seen,” said one White House official. “Tinkering with that would not be as unpopular as fooling with the personal rate.

“On the other hand, if they need to raise the personal rate to strike a compromise, they could go up one or two percentage points on it. In the end, we could get by with any number with a two in front of it--but not with a three.”

Times staff writers Eleanor Clift and Tom Redburn contributed to this story.