Senate Rejects Restoring Tax Breaks on IRAs

The Senate narrowly rejected a major effort to restore tax breaks for all contributors to individual retirement accounts Wednesday, clearing the way for a sweeping tax overhaul bill to be approved largely intact, perhaps as early as Friday.

“Clearly now, we’re not going to have any major change in the outlines of the bill,” Senate Finance Committee Chairman Bob Packwood (R-Ore.) told reporters after the amendment was defeated.

The Senate voted 51 to 48 to kill an amendment proposed by Sens. Alfonse M. D’Amato (R-N.Y.) and Christopher J. Dodd (D-Conn.) that would have provided a 15% tax credit for all IRA contributions. The proposal would have boosted taxes on business and the wealthy by about $15 billion over five years to make up revenue lost to the Treasury by the IRA credit.

Resolution Approved

Earlier in the day, the Senate overwhelmingly approved a non-binding resolution urging restoration of IRA deductions when negotiators meet next month to thrash out the differences between the Senate bill and the House version that was approved late last year.

But Packwood did not promise to save IRA deductions for all workers, who are allowed under current law to deduct up to $2,000 a year for IRA contributions.

The House bill would preserve IRA deductions for most employees but would eliminate IRAs for those who contribute more than $2,000 to employer-sponsored 401(k) retirement plans.

Senate Republican leaders opposed the IRA amendment out of fear that any substantive change to the tax bill, which would drastically reduce tax rates by curtailing a large number of business and individual tax preferences, could open the gates to a flood of changes. They also urged members to defeat the amendment by pointing out that boosting taxes on corporations as proposed in the amendment would harm some key industries, such as timber and oil, in several states represented by members.

“We need to defeat this amendment,” Senate Majority Leader Bob Dole (R-Kan.) said, “so we don’t start unraveling the bill.”

Under the Senate package, taxpayers who are covered by company pensions would no longer receive a tax deduction for contributing to an IRA. Those without pensions would be free to take a full deduction, up to $2,000 per worker. All IRA holders, whether or not they receive a deduction, would remain eligible to defer taxes on the earnings in their IRA accounts until they are withdrawn.

On the key vote, California’s two senators--Democrat Alan Cranston and Republican Pete Wilson--voted to retain the IRA amendment.

The close vote on the D’Amato-Dodd proposal was taken after Senate leaders engineered an overwhelming 96-4 vote in favor of a non-binding resolution that undermined support for the proposed legislation restoring the IRA tax break.

‘Highest Priority’

The resolution instructs Senate tax negotiators from the Finance Committee to give the “highest priority” to preserving IRA tax breaks when they meet with House lawmakers to resolve differences between the two versions of tax revision. It also contains language, however, that would make it difficult to pay for restoring upfront IRA deductions.

By introducing the resolution, Senate leaders made it politically feasible for a handful of wavering lawmakers to vote against the IRA amendment. The senators now can point to their support for the resolution in defending themselves against potential attacks from campaign opponents on the IRA issue.

But advocates for IRAs denounced the maneuver as meaningless, charging that nothing would prevent tax negotiators from ignoring the resolution.

Lawmakers “should not delude themselves that they have taken care of the (IRA issue),” said Wilson, a co-sponsor of the IRA amendment.

Senate Move Challenged

Sen. Alan J. Dixon (D-Ill.) cited a letter from House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) in attacking the resolution. Rostenkowski, who will lead House negotiators in the tax conference, challenged the Senate move because it does not suggest any way to pay for restoring IRAs.

“It is unrealistic, in my view, to expect the conference to patch up what the Senate itself seems unwilling to face,” Rostenkowski wrote.

Many of those who attacked the resolution, including D’Amato and Dodd, nonetheless voted for it, thus avoiding being on record against IRAs. One amendment that would have permitted IRA deductions but would have cut the personal exemption for taxpayers who itemize was defeated on a 76-21 vote.

Another amendment to salvage IRAs also was rejected, 78-18.