Battle to Keep IRA Tax Deduction Nears

The Senate began debate on a landmark tax overhaul bill Wednesday, with members predicting a close vote on a proposal to preserve the tax deduction for individual retirement accounts.

Senate Finance Committee Chairman Bob Packwood (R-Ore.), kicking off a legislative battle that is likely to last through the month, called it “the most radical tax bill this Congress has seen in half a century.”

Packwood, whose committee unanimously approved the proposal last month, urged the Senate not to “fail to grasp . . . what I think is the most extraordinary opportunity we are likely to see in our lifetime” to drastically lower tax rates and eliminate unneeded tax preferences.

Most in 15% Bracket

Under the Senate bill, several tax preferences would be pruned, while tax rates would be slashed from the current top level of 50% to a stated maximum rate of 27%. Nearly 80% of all families would be in the 15% tax bracket, although some affluent taxpayers would face an effective tax rate of 32% on part of their income.

The average taxpayer would receive a tax cut of about 6% in 1988, when the bill would become fully effective, and about 6 million low-income individuals would be dropped from the income tax rolls entirely.

Business would be required to pay an estimated $100 billion in higher taxes over the next five years, with some tax breaks aimed at specific investments eliminated while the overall corporate tax rate would drop to 33% from 46%.

Although substantive action on the tax bill is not expected until next week, the opening shots on the Senate floor demonstrated broad support for the Finance Committee’s tax revision package. The bill ultimately seems assured of Senate approval in something close to its present form.

Whatever happens, the bill could not become law before differences between the Senate version and the bill approved by the House late last year are settled by negotiators from both houses of Congress.

Before the debate is over in the Senate, however, several major amendments are expected to be introduced. In addition to proposals to change the bill in various ways to make up for the reve1853187360deductions for all taxpayers, senators have said that they will urge the preservation of charitable deductions for taxpayers who do not itemize, the imposition of a higher tax rate on wealthy individuals and several specific changes to help particular interest groups.

The fight to protect IRAs looms as the major test for the tax bill, which would eliminate the deduction of up to $2,000 for IRA contributions by taxpayers who are covered by a company pension plan. The earnings on all IRAs would remain tax-free until withdrawn for all taxpayers and even those who would lose the deduction would be allowed to continue adding to their retirement accounts.

80% Would Lose Deduction

About 40 million workers have IRAs, and about 80% would lose the deduction under the Senate bill.

To restore deductions for all IRA contributors without increasing the budget deficit requires finding about $26 billion in revenues over five years from other sources, a task that is likely to be the biggest obstacle facing advocates of the amendment.

Supporters of the tax bill urged the Senate to reject any proposal to restore the IRA deduction, saying that attempts to save the widely used tax break could undermine the entire package.

“This bill is not a house of cards, but it can’t stand much revision,” said Sen. Bill Bradley (D-N.J.). Later, Bradley, a longtime advocate of overhauling the tax code, told reporters that he believes other interest groups that want to see the bill defeated are supporting the IRA campaign in hopes that the coalition backing the overall package would collapse.

But Sen. Alfonse M. D’Amato (R-N.Y.), one of several senators up for reelection this year who advocates restoring the popular IRA deduction, argued that the bill “denies most working people the benefits of IRAs.” Reflecting a growing rebellion against efforts by Senate leaders and the Administration to push the bill through without any major amendments, D’Amato said that he “did not come to Washington to be a rubber stamp.”

In winning approval to bring the bill to the Senate floor, Packwood agreed that any extra revenues garnered by the tax package in 1987 would not be used in any “phony deficit-reduction” s1667786093tax revenues as current law over a five-year period but it would boost revenues by an estimated $22.6 billion in the next fiscal year.

Packwood said that he would work out a “kind of trust fund” with the Senate Budget Committee so that the additional revenues would not be counted toward meeting the deficit targets of the Gramm-Rudman budget-balancing law.