Negotiations Between Tax Chiefs Break Down : New Projections Indicating $17-Billion Increase in Deficit Disrupt Talks as Accord Seemed Near
Intense negotiations between the two chief congressional tax bargainers abruptly broke apart Thursday night because new revenue projections indicated that the tax overhaul plan they were considering could increase the federal deficit by $17 billion over the next five years.
The breakdown occurred just as Senate Finance Committee Chairman Bob Packwood (R-Ore.) and House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) appeared on the verge of wrapping up a detailed package to resolve differences between House and Senate tax overhaul proposals.
The two negotiators said they hoped to meet today in an effort to find a solution to the impasse, but they appeared to be somewhat at odds over how to proceed.
Although the last-minute hitch cast further doubt that tax bargainers could reach a firm accord before Congress this weekend begins a three-week recess, the tax revision effort did not appear to be in immediate danger of collapse.
But the new deficit estimates Thursday by congressional tax analysts suggested that negotiators will have an even harder time holding tax rates for individuals close to the nominal 27% top rate in the Senate bill.
“I’m never going to say this bill is dead,” Rostenkowski said. “I’ve lived with the son-of-a-buck too long.”
But he added: “It’s a blow to us to have been so close, and yet so far.”
Packwood appeared even more depressed by the sudden turn of events.
“We could have reached (an agreement), but there was no point,” he said. “We’d still be out of whack.”
The $17-billion revenue shortfall resulted in part from lower industrial growth forecasts that lessened the savings that were to be reaped from the repeal of the investment tax credit and other corporate preferences. That left the increase in the corporate tax burden at $114 billion--$10 billion less than expected.
On the other side of the ledger, the projected tax cut for individuals over the next five years grew by $7 billion to $131 billion.
Indications that the compromise was falling apart surfaced about an hour after Packwood entered Rostenkowski’s office for what was to be a final nightlong bargaining session.
House Democrats said that they would press Senate tax negotiators to scale back corporate tax preferences by an additional $10 billion to help bring the bill back into balance.
$10-Billion Impasse
“We’re really at an impasse,” Rep. Charles B. Rangel (D-N.Y.) said, “because of the $10 billion they (the Senate negotiators) won’t raise.”
But Packwood was reluctant to rush to judgment on the unexpected problem.
“I don’t know what will happen,” he said, adding that congressional tax analysts may “get some miracle numbers tomorrow” so that the compromise could be put back together.
Earlier in the day, most of the building blocks of a final agreement appeared to be falling into place.
On the politically sensitive issue of individual retirement accounts, for example, Packwood said the final package would allow millions of relatively affluent taxpayers covered by pension plans at work to continue to earn tax-deferred income on future contributions to individual retirement accounts. But the contributions themselves--up to $2,000 a year--would no longer be tax deductible.
For businesses, the tentative agreement included a maximum tax rate of 34%, one percentage point greater than the rate in the Senate-passed bill.
Altogether, the tentative agreement was designed to increase business tax payments by an estimated $124 billion over six years, compared to current law. That would have allowed individual taxes to be cut by the same amount without adding to the federal deficit.
Even if Packwood and Rostenkowski can revive their accord this week, it would still require Senate negotiators to trim at least an additional $4 billion in corporate tax preferences beyond those the Senate team had included in its latest offer to the House earlier this week. Of the total, $2 billion must come from general write-offs for investments and the other $2 billion from specific industries, including oil, defense and high-technology.
Higher Taxes on Oil
Sen. Malcolm Wallop (R-Wyo.) said negotiators from energy-producing states had accepted some cutbacks in oil and gas tax preferences--one of the key stumbling blocks to a final agreement--that would increase taxes on the oil industry about $600 million above the original Senate bill.
“We think we have heard (Packwood) say he can sell” the oil compromise to Rostenkowski, Wallop said. “And if he can’t,” he warned, “we’ll just have to wait until September.”
Rostenkowski and Packwood want to seal a tax-overhaul agreement before Congress begins its recess this weekend, fearing that it may be more difficult to restart negotiations next month if lawmakers are pelted with another round of election-year pleas from special interests during the recess. However, even if the tax negotiators finish their work in the next few days, the House and Senate could not pass the bill until after they return to work on Sept. 8.
Senate negotiators cautioned that any tax agreement would still be subject to minor adjustments after Congress returns from its recess. “I can’t believe there won’t be a chance,” said Sen John H. Chafee (R-R.I.), “to vary a little bit on some details after brooding over these things.”
Sales Tax Deduction
Under the tax revision proposal, state sales tax deductions now are almost certain to be eliminated for taxpayers in most states, including California.
Packwood told Senate negotiators that Rostenkowski, apparently willing to go even further than the Senate position, offered to abolish the state sales tax deduction. However, some Senate bargainers are holding out for the sales tax provision in their bill, which allows a partial sales tax deduction in states with little or no dependence on an income tax.
Rostenkowski’s maneuver appeared designed to put Packwood in the awkward position of undercutting a compromise he accepted to help assure support of the tax bill from senators in states without income taxes.
Rangel, although refusing to confirm Rostenkowski’s sales tax proposal, said some people have complained that no state should benefit from the sales tax deduction if New York, which has a stiff income tax, cannot.
Packwood told reporters that the House, which retained the sales tax deduction in its original bill, had “basically” accepted the Senate position on the issue.
More Loose Ends
Several other loose ends remained to be tied up.
Both Senate and House negotiators said there was still no final compromise on the issue of trimming a valuable tax break for defense contractors. Sen. John C. Danforth (R-Mo.), who represents a swing vote on the delicately balanced Senate tax team, has adamantly defended that tax break.
And a handful of key Senate conferees, Chafee said, were resisting a House proposal to limit the use of tax-exempt bonds by such large private universities as Stanford and Harvard to a maximum of $150 million each.
Earlier in the day, Packwood brushed aside an initial estimate by congressional tax experts that the tax overhaul plan would fall $10 billion short of raising the same revenues over the next five years as current law.
“That’s the third re-estimate I’ve had in six weeks,” Packwood said.
Perhaps half in jest, Rangel offered the ultimate answer: “We gave them the New York solution. File for bankruptcy.”
