Conferees Split on Suspension of Indexing

Senate and House negotiators moved close to agreement on most aspects of the tax overhaul plan affecting individuals Thursday.

Chairman Bob Packwood (R-Ore.) of the Senate Finance Committee outlined major elements of a new offer that would generally go along with the House proposal to limit fully deductible individual retirement accounts primarily to middle-income taxpayers and make it more difficult to deduct medical expenses.

But the heart of the latest Senate proposal--suspending for one year the automatic adjustment that protects taxpayers from being pushed into a higher tax bracket by inflation, called indexing--won no converts among the House bargainers.

Rostenkowski ‘Pleased’

“On the individual side, I’m pleased,” Chairman Dan Rostenkowski (D-Ill.) of the House Ways and Means Committee told reporters after discussing the Senate plan with his negotiators. “It’s a good step on IRAs,” he added, but “we’ve got a lot of corporate reform to do” before a final package can be adopted.

Packwood conceded that the Senate proposal contains provisions the House would reject. “Clearly, the House is not going to come back and accept this position,” he said.

Packwood continued to insist that the negotiations can be wrapped up without boosting the low tax rates in the Senate bill.

But it is becoming increasingly clear that the only way to resolve the differences between the two camps may be for the conferees to accept slight increases in the 27% top individual tax rate and the 33% maximum corporate rate in the Senate bill. Under current law, the maximum tax rate is 50% for individuals and 46% for corporations.

Senate Plan Attacked

Both Democrats and Republicans in the House attacked the Senate proposal not to adjust tax brackets to inflation in 1989. That approach would hit particularly hard at middle- and lower-income taxpayers and add an estimated $21.5 billion to personal tax payments.

“It’s a sneaky way to collect taxes,” said Rep. John J. Duncan of Tennessee, the senior Republican on the House negotiating team. He said the four GOP representatives on the 11-member House team were united against the Senate plan to suspend inflation adjustments.

House tax writers questioned also the way the Senate proposed to fill a $17-billion revenue gap in their package by calling for more agents and tougher enforcement of the tax laws by the Internal Revenue Service.

“Over the indexing and IRS, we couldn’t speak for the laughter,” said Rep. Charles B. Rangel (D-N.Y.).

Politically Sensitive

On the politically sensitive IRA issue, only one problem remained to be resolved. Packwood still wants to allow a non-deductible IRA contribution for families with incomes above $50,000 ($35,000 for singles) who are covered by a pension plan at work. Earnings from such accounts would be tax free until the date of withdrawal.

Like the House plan, the Senate would allow a full $2,000 IRA deduction--whether or not a taxpayer is covered by a pension plan--for couples with incomes of as much as $40,000, phasing out the deduction at $50,000. Both plans would allow the full IRA deduction for singles earning under $25,000, phased out at $35,000.

Those without company pension plans would be entitled to full IRA deductions even if their incomes exceeded those limits.

The Senate and House now agree that medical expenses exceeding 7.5% of adjusted gross income would be deductible, up from 5% under current law.

Tax writers agreed also to exempt existing public employee pension plans in California and 13 other states from a rule limiting the amount of money early retirees may receive.