House and Senate Teams OK Tax Bill : Way Cleared for Congress to Give Its Final Approval After Summer Recess

Both Senate and House tax writers, meeting in separate sessions, voted Saturday to approve a sweeping bill to eliminate many tax breaks and slash the maximum personal tax rate from 50% to 28% for most taxpayers.

The Senate team voted 8-2 for approval, and the House tax negotiaters promptly followed suit in closed session. Still pending was a formal vote by the two sets of tax negotiators meeting in open session late Saturday night.

The tax negotiators reached their agreement only after overcoming some 11th-hour snags in a package prepared early Saturday morning by Senate Finance Committee Chairman Bob Packwood (R-Ore.) and House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.).

Final Approval Delayed

Agreement by the tax negotiators would clear the way for the full House and Senate to give the bill their final approval to the historic bill soon after they return on Sept. 8 from their summer recess.

Enactment of the bill would spell a tax cut for most individuals in 1988, when almost all provisions of the new tax code would be fully effective. The average tax cut for that year would be 6.1% compared with taxes under current law, with lower- and middle-income taxpayers receiving the largest percentage reductions.

Some taxpayers would fare less well next year, however, because tax breaks would be eliminated as of the first of the year but the rate cuts would not take effect until March 15.

The average tax cut in 1987 would be only 1.6%. Taxpayers earning more than $75,000 would, on average, experience a tax increase next year, with those in the $200,000-and-up bracket being socked by an average tax hike of 11.4%.

Altogether, the tax bill would cut personal tax payments by $121.7 billion through 1991 and boost corporate and other taxes by $121.9 billion, according to congressional tax analysts.

Among their final decisions, the tax writers decided to abolish the deduction for state and local sales tax payments. State income taxes would still be deductible. Senate negotiators agreed not to press to restore the sales tax deduction for taxpayers living in states without income taxes in return for a promise by the House team not to abolish a special tax break for defense contractors.

The final adjustments became necessary when some negotiators initially balked at parts of the agreement worked out early Saturday morning by Packwood and Rostenkowski.

Multitude of Problems

Part of the 11-member House tax-writing team complained that the bill would not provide enough tax relief to enough taxpayers. Some Senate negotiators, reluctant to go along with the deal until they could study the fine print of the 99-page document, found a multitude of tiny problems affecting interests in their states.

The tax teams tinkered with the package throughout the day. After a series of minor adjustments, Rostenkowski told reporters: “It’s looking much better. There’s every indication we’ll be able to sell the rates and distribution.”

Besides slashing tax rates, the final bill would substantially boost the personal exemption for taxpayers and their dependents--but not as quickly as provided in either the House-passed or the Senate-passed bill.

Personal Exemption

In one of their last-minute decisions, the tax negotiators determined that the personal exemption, currently $1,080, would rise to $1,900 next year and $1,950 in 1988 before finally reaching the target of $2,000 in 1989. After that, it would rise with inflation.

The tax writers also accepted a huge jump in the standard deduction for taxpayers who do not itemize their deductions. They determined that the standard deduction would jump from the current $3,670 to $5,000 for couples and from $2,480 to $3,000 for singles.

Ostensibly, all personal taxable income would be taxed at one of only two rates--15% for the first $29,000 in income for couples and 28% for the rest of their income in 1987. The break point between the two rates would rise to $29,750 in 1988.

Top Rate of 33%

But some relatively affluent taxpayers would face a top rate of 33% because of a wrinkle in the bill that would phase out the benefit of the 15% rate beginning at a taxable income of $50,000 for couples. For couples in the $50,000-and-up bracket, some of their first $29,000 in income would be taxed at 28% instead of 15%.

Some House negotiators pushed for a 29% top tax rate to gain revenue lost by granting some additional tax benefits for taxpayers below the top income levels. But the Senate team held the line at 28%.

As approved by the Senate negotiators, the bill would concentrate its greatest percentage of tax breaks on lower-income taxpayers.

The average cut for taxpayers with incomes between $20,000 and $30,000, for example, is estimated at 9.8%. By contrast, taxpayers earning between $50,000 and $75,000 would enjoy an average tax reduction of only 1.7%, and those earning more than $200,000 would receive a 2.3% cut.

Politically Sensitive

Negotiators did not tamper with the agreement between Packwood and Rostenkowski on individual retirement accounts.

On that politically sensitive issue, taxpayers filing joint returns who earn less than $40,000 ($25,000 for singles) could continue to make deductible IRA contributions of up to $2,000 for workers and $250 for non-working spouses. So could all taxpayers not covered by pension plans at work.

More affluent taxpayers covered by pension plans would lose some of their tax benefit. The deductible contribution would be phased out for taxpayers with incomes between $40,000 and $50,000 ($25,000 and $35,000 for singles) and eliminated beyond those income levels. Those taxpayers could continue contributing to IRAs, however, and the earnings would still be tax-deferred.

Limit on 401(k) Plans

An individual’s tax-free contributions to employer-based 401(k) retirement savings plans would be limited to $7,000, down from $30,000 under current law.

The bill would also eliminate or reduce several other popular deductions, such as those for consumer interest and medical expenses. Non-itemizers, however, could continue to claim a deduction for charitable contributions.

The tax agreement attempts to modestly close a loophole that would be created by eliminating the deduction for consumer interest but allowing deductions for most home-related borrowing--second mortages as well as first mortgages.

Homeowners would be allowed a deduction for borrowing against the value of their first and second homes only up to an amount equal to the original purchase price plus an additional allowance for home improvements, unusual medical expenses and family educational costs.

Tax Shelters Dismantled

The plan, largely by boosting the personal exemption and standard deduction, would take 6 million of the poor off the tax rolls. For taxpayers at the other end of the income scale, it would shut down most real estate tax shelters, which provide boons to some high-income people.

For corporations, the reduction in the maximum tax rate from 46% to 34% would be more than offset by the elimination of a host of valuable tax breaks.

Most significantly, the investment tax credit would be wiped out retroactively to last Jan. 1. That tax break, of particular importance to heavy industry, allows businesses a tax credit of up to 10% of the cost of investment in new plants and equipment.

Current tax write-offs to offset the depreciation of the value of plants and equipment, which were made much more generous in 1981, would be largely retained. The one exception would be investments in real estate, which would become much less attractive from a tax point of view.

Progress Pleases Reagan

As tax negotiators entered the home stretch, their progress satisfied President Reagan, who must ultimately sign the bill that Congress sends to him. Reagan was briefed on the negotiations as he left the White House on Saturday for a California vacation.

His spokesman, Larry Speakes, said: “We need to know more detail, but it’s headed in the right direction.”