Senate Conferees Set Stage for Battle Over Tax Breaks for Industries

Senate tax negotiators dug in their heels Saturday against imposing any significant limitations on tax breaks for favored industries, laying the final groundwork for a major battle with House tax bargainers this week.

The 11 Senate conferees put the finishing touches on an offer that barely inches toward a compromise with the House and takes back some of their earlier concessions on provisions affecting banks and heavy industry.

After finishing a complete review of the details of the proposal expected to be offered to House negotiators on Monday, the Senate team found that it had agreed to a variety of changes that would widen the federal deficit gap by $2 billion over the next five years.

‘Dribbled It Away’

“We just dribbled it away,” Senate Finance Committee Chairman Bob Packwood (R-Ore.) conceded Saturday after two full days of closed meetings with his own bargaining group.

As a result, the Senate tax bargainers made a last-minute decision to add $2.2 billion in revenues to prevent their bill from exacerbating the budget deficit.

One change would limit the amount homeowners could borrow against their equity in a principal residence and a second home. The other would repeal a low-income housing credit after 1988.

Financially Troubled Banks

The senators already had agreed in an earlier offer to accept a House proposal to eliminate tax deductions for banks that set up bad-debt reserves in advance of actual loan losses. But Saturday, the panel agreed to make an exception to the rule for so-called financially troubled banks.

The proposal, which would lose an estimated $380 million in revenues over five years, was recommended by Treasury Department officials, who said they feared the tax bill “in aggregate” might weaken struggling banks.

But the Senate plan would still go a long way toward trimming tax preferences that currently enable many banks to reduce their tax liability to practically nothing.

Mounts Heavy Campaign

The banking industry, in an effort to protect its tax preferences as best it can, has mounted one of the heaviest business lobbying campaigns of the tax conference. A former Treasury Department tax official, John E. (Buck) Chapoton, was hired by the industry to work on its behalf. He could receive a bounty of as much as $500,000, according to sources who asked to remain anonymous, if he succeeds in preserving a significant portion of the tax break for bad-debts.

On other issues, the negotiators narrowly beat back an effort to exempt real estate developers from a major provision in the tax bill that would prevent real estate investors from writing off paper tax losses against their other income.

The proposed change, which would have lost about $2 billion in revenues, was defeated on a 6-5 vote in what Packwood called a “tough battle.”

‘Not as Badly Hit’

The Senate bargainers also moved to protect basic industries from tough restrictions included in the corporate minimum tax. “Very, very capital-intensive industries would not get as badly hit in the minimum tax,” Packwood told reporters.

The estimated $2-billion loss in revenues from the change would be made up by changing the proposed system of investment write-offs in a way that slightly benefits the struggling oil and gas industry at the expense of several different manufacturing industries.

“We’re juggling it around so it’s relatively painless for everybody,” said Sen. John H. Chafee (R-R.I.).

Remain Far Apart

But despite the dozens of different decisions made by Senate negotiators over the last two days, the two sides of the tax conference remain far apart on the central issue of how much they are going to increase corporate taxes.

The plan by the Republican-dominated Senate team would boost taxes on corporations by $118 billion over a six-year period; the Democratic-controlled House proposes a $142 billion increase. The Senate plan also contains two major proposals that would raise nearly $39 billion in revenues that House members have already indicated they are likely to reject.

Nonetheless, Packwood continued to predict that tax bargainers can wrap up their negotiations by the end of the week, when Congress is scheduled to adjourn for a three-week recess.

“Going out (in mid-August) without a completed package,” he said, “would mean that every single special interest would take one last shot saying, ‘Please save us from extinction.’

“None of us,” he added, “wants that.”