House Spurns Senate Proposal on Tax Rates

Key House Democrats on Monday all but rejected a compromise tax plan that the top Senate negotiator had described as the last hope for slashing maximum tax rates to 27% for individuals and 33% for corporations.

After studying the latest Senate offer late Monday, Rep. Charles B. Rangel (D-N.Y.) said House bargainers were agreed that the proposal failed to budge the tax talks from a weeklong gridlock, which threatens to force the talks beyond their informal Friday deadline.

“They want to keep the 27% (individual) rate, protect the vested interests and not compromise anything with us,” Rangel said. “I just can’t believe they want to live with this offer.”

Sees Higher Rates

Rep. Richard A. Gephardt (D-Mo.) said flatly that the offer would force increases in the tax proposal’s rates, which have provided the bedrock of political support for Congress’ tax-revision plans.

“In order to pay for them,” Gephardt said, “we’re going to have to go to 28, 29 on the individual side and 34, 35 on the corporate” side of the tax proposal. Today’s top tax rates are 50% for individuals and 46% for businesses.

Senate Finance Committee Chairman Bob Packwood (R-Ore.), the Senate’s top tax bargainer, had warned the Democrats who lead the House tax team that the 27% and 33% maximum rates could not be saved unless House Democrats accepted two controversial money-raisers proposed by the Senate.

“Otherwise,” he said, “you’re looking at a shortfall of $35 or $38 billion and I don’t know where you’d get that kind of money.”

Hope to Finish Friday

The money is important because House and Senate tax negotiators have vowed that the revised tax code, a compromise based on bills passed by the House last year and the Senate earlier this year, will raise as much money as the current tax code. They are trying to finish writing a final tax overhaul by Friday, when Congress is scheduled to recess until the second week of September.

The heightened prospect that negotiators will be forced to accept somewhat higher tax rates led some in the crowd of lobbyists and aides involved in the tax negotiations to sprout new lapel pins Monday urging Senate bargainers to “Hold the Rates.”

To preserve the low rates, the Senate would eliminate for 1989 only the adjustment in tax brackets for inflation, and it would order the Internal Revenue Service to crack down on tax cheats. Eliminating the tax code’s inflation adjustment would cost taxpayers an estimated $21.5 billion, and stricter IRS enforcement could raise an additional $17 billion over the next five years.

Preferences for Industries

Packwood and the 10 other Senate bargainers are continuing to insist that the final tax bill preserve a long list of tax preferences for major industries, from banking to defense to oil and gas.

But the Democrats who dominate the House negotiators have ridiculed the delay in the inflation “indexing” as a potential blow to middle- and lower-class taxpayers, and they have dismissed the $17 billion in IRS enforcement revenues as massively inflated.

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) declined comment Monday evening on the Senate proposal, which would raise corporate taxes by an estimated $120 billion and slash personal taxes by an equal amount through 1991. Rostenkowski’s House bargainers have proposed a $141.7-billion business tax increase and an individual tax cut of roughly the same size.

The details of the Senate plan, crafted in lengthy private sessions during much of last week, were made public by Packwood on Monday, but they differed little from outlines of the proposal that were disclosed late last week.

Impact on Individuals

The proposal would raise roughly $5 billion more from corporations than did the last formal Senate offer. The latest plan contained details on two new changes with potentially significant impact on individuals.

One new provision would limit the deduction for interest payments on home-equity loans. The provision would bar homeowners from deducting interest on such loans when their total borrowing exceeded the original price of the home plus the cost of home improvements, educational expenses and medical costs.

And by accepting a controversial House provision on tax-free bonds, Senate negotiators made it clear that the final tax bill is now likely to require those who receive interest from tax-exempt bonds to include the income in calculating the 20% individual minimum tax.