Tax Reformers Get Down to Political Nitty-Gritty

Congress now is getting down to the political nitty-gritty of tax reform legislation.

The Senate has passed its version and the House has its version. Now the conference committee of Senate and House members has to produce and approve a tax reform bill that will be an acceptable compromise of House and Senate versions. And the result must warrant President Reagan’s signature to make it law.

The major difference in the Senate and House versions focuses on the actual taxing rates on income. The House version has four rate groups, from a low of 15% to a high of 38%, whereas the Senate bill has only two categories--15% and 27%. Both represent cuts in the individual tax rate, and both would shift more of the tax burden to corporations.

The Senate version virtually destroys tax shelters affecting real estate and home building, whereas the House bill merely cuts back on their use. Additionally, there’s the matter of the Individual Retirement Accounts that have provided a temporary tax shelter for millions of Americans, who are encouraged to save additional money for their future retirements.

This money has provided a large pool of investment funds for mortgages, thus helping the housing and real estate industries. The Senate bill negates the IRA tax deferral.

In fact, Washington developer Angelo Puglisi said that the upturn in the housing market, which was highly depressed in 1981-82, coincides with the exceptional popularity of IRA accounts.

Pulglisi and other area realtors and developers note that the role of the Senate-House conference committee is highly strategic because those committee members are expected to make compromises between traditional deduction items and lower tax rates. For instance, the lower Senate tax rate is predicated on a stiff minimum tax, plus a tougher depreciation schedule and loss of more favorable capital gain taxing rates.

Incidentally, the pressure of the tax reform bill is greater on House members--all of whom stand for reelection this year. Only one-third of the 100 Senate seats are subject to voter approval this fall.

There’s also a highly significant item of interest to homeowners. Both the Senate and House have unlimited deductibility of mortgage interest for first and second homes, but the Senate version would not provide the same deductibility for interest paid on consumer purchases of automobiles and major appliances. The House version would limit interest deductions to $20,000 on joint returns.

But there’s a loophole that probably will cause a problem for the conference committee. Savvy homeowners already have learned that they can sign up for one of those many home-equity credit plans offered by lending institutions.

This enables them to increase loans on their homes--with interest being deductible--to finance purchases of cars or major home appliances--even vacations.

At the end of a year, the homeowners would be able to deduct all their mortgage interest charges and use those amounts as offsets against their federal income tax bills. The difficulty of closing this loophole could enable the House version to prevail--and thus continue the usual deductions for consumer loans up to a cap--such as $10,000 per person.

Will the tax rate itself be higher or lower? Some close observers take the view that the Democrats--led by House Ways and Means chairman Dan Rostenkowski (D-Ill.) fear a campaign edge for Republicans if a higher tax rate is passed. Rostenkowski’s staunch supporter, Robert T. Matsui (D-Sacramento) foresees a battle on the rate issue. But when the conference smoke clears, the Republican Senate’s lower rate is expected to prevail--mainly because the Democrats don’t want to give Republicans a campaign issue.

Meanwhile, lobbyists of the National Assn. of Home Builders are concentrating on efforts to preserve unlimited deductions of losses for rental real estate activities and tax incentives for investment in low-income housing. The National Assn. of Realtors supports those goals and also wants elimination of the Senate’s provisions dealing with real estate depreciation.

The Mortgage Bankers Assn. is concerned that the Senate version would reduce commercial investment values for investors who bought commercial properties before the tax rules were changed.

It is difficult to predict what will happen in the Senate-House Conference Committee, but some surprises are expected. The conference group should complete its compromise by Aug. 15 and then get approval from the Senate and House before being sent to the President.