Lobbyists to Seek ‘Consumption’ Levy : Future Tax Bill Revisions Being Planned

When the Senate approved its version of tax overhaul legislation in June, members were so tired of voting on tax bills that they insisted on including a provision to prohibit any further major tax changes for the next five years.

The idea, however, never made it into the final package accepted by House and Senate tax writers.

“Much as I’d like to hang a ‘Gone fishing’ sign (outside my door),” House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) said last week, “I’m afraid we’re not going to be able to do that.”

Indeed, even before final passage of the tax revision bill, plans are being drawn to overturn it in the next few years. As Congress returns Monday for a final monthlong session during which it is all but certain to give its stamp of approval to the Tax Reform Act of 1986, lobbying groups are already gearing up for a future push to impose some form of a “consumption” tax that would be similar to a national sales tax.

“As the current round of tax reform draws to a close,” said Mark Bloomfield, president of the American Council for Capital Formation, which sponsored a three-day gathering last week of politicians, scholars and business representatives on the issue, “a consumption tax could very well be the new frontier of fiscal policy to deal with the deficit” and to restore lost tax breaks for business. The ACCF is headed by one of Washington’s premier lobbyists, Charls Walker.

A consumption tax is only one of several new tax proposals--and it remains a long shot--that already are being kicked around in Washington. Other proposals include an increase in excise taxes on such items as gasoline, cigarettes and liquor, an across-the-board trimming of itemized deductions, an income tax surcharge and a restructuring of the Social Security tax.

A driving force behind nearly all the tax proposals is the desire to reduce the federal budget deficit, which is expected to hit a record $230 billion by the time this fiscal year ends on Sept. 30. Although Congress--through a host of technical maneuvers--has a shot at meeting next year’s Gramm-Rudman deficit target of $154 billion without a tax hike, many believe that further spending cuts are just about exhausted and that additional gains will require raising revenues.

Need for Tax Increase

“Everyone knows we will eventually need a tax increase to reduce the deficit,” Rostenkowski said.

But “everyone” doesn’t include President Reagan, who remains adamantly opposed to a tax hike. Since Reagan’s reelection in 1984, the White House has been so successful in deflating the pressure for higher taxes that reporters recently have given up even asking about the matter at presidential press conferences.

Despite Reagan’s opposition to including a tax increase as part of any broad approach to dealing with the federal budget, the deficit continues to gnaw at most lawmakers.

With the tax overhaul plan designed to raise the same amount of revenues as current law, “it’s obvious we’ve done nothing to alleviate the budget monster,” said Sen. Dave Durenberger (R-Minn.), a member of the Senate Finance Committee. “The only viable option to solve the budget deficit mess,” Durenberger argued, “is to phase in a consumption tax.”

Advocates of a consumption tax contend that what is needed is a massive “value-added tax,” a kind of hidden sales tax, that could raise as much as $180 billion annually if imposed at a 10% rate on most purchases of goods and services. The tax would be built into the price of the product when it was produced so it would not be added on at the time of sale. The proceeds could dramatically narrow the federal budget gap, with enough left over for lawmakers to spend on their own pet causes.

Investment Incentives

Some business groups and economists see the revenues from a national sales tax as the only hope for reducing the tax burden on corporations, using part of the money to finance the salvaging of investment incentives that will be eliminated by this year’s tax bill. They argue that this year’s tax bill, by shifting about $25 billion a year in taxes from individuals to corporations, will drain needed funds for business investment, making it even more difficult for U.S. companies to compete against foreign firms.

“Our tax code is getting increasingly out of sync with other industrialized nations’ (tax codes),” Bloomfield said.

But hopes for a revival of the investment tax credit, which provided an immediate tax savings up to 10% of the cost of buying new plant and equipment, are likely to be dashed. Durenberger, despite his strong support for a consumption tax, insists that business should forget about it because it has already been debated so extensively. “People (should) hold their own wakes for the investment tax credit,” he said. “It’s gone.”

Payroll Tax Burden

Durenberger suggests that any additional revenues from a consumption tax beyond those applied to the deficit might be better used to reduce the heavy Social Security payroll tax burden, which is scheduled to rise to more than 15% on both employers and employees at the beginning of 1988. Other lawmakers have their own ideas. “The tax is not so much the problem,” Durenberger said, “but where it is going to be spent.”

The business groups campaigning for a consumption tax, however, are counting on an economic downturn to cause Congress to reverse many of the tax changes lawmakers accepted in this year’s bill, and to prompt some form of increased taxes for consumers.

“If we go into a recession,” said Gordon Richards, an economist at the National Assn. of Manufacturers, “we’ll see massive damage control.”

And Kevin Phillips, a savvy conservative political advocate of a consumption tax, acknowledged that “if the economy booms in the next few years under the new tax code . . . good arguments (for it) will fall on unlistening ears. Unfortunately, the most plausible strategy for a consumption tax lies in a 1987-88 economy that develops in a way to underscore the U.S. fiscal, tax, and trade problems.”

Democrats’ Clout

While there is already strong support for a consumption tax among the business-oriented members of the Senate Finance Committee, House Democrats remain firmly opposed to that approach and probably hold enough political clout to derail any such proposal. They point out that such a tax would hit hardest on lower- and middle-income taxpayers, who spend a greater portion of their income than affluent families.

“To ask this nation to pay an additional tax that is neither practical nor fair is bad economics--and lousy politics,” Rostenkowski said. “If we need more money for government, then let us go through the front door and collect it from those who can pay, not through the back from those who can’t.”

If taxes are going to be increased, Rostenkowski favors a boost in income tax rates rather than a new consumption tax.

Even if there weren’t any pressure to boost taxes, Congress will be tinkering next year with many of the provisions in the current tax bill. “If nothing else, we’re going to see a major technical-corrections bill,” said Sen. Lloyd Bentsen (D-Tex.), who will become the top Democrat on the Finance Committee next year and would take over as chairman if that party wins control of the Senate.

Hundreds of Proposals

“I suspect that early in the next Congress, we’ll see hundreds of proposals to change the tax bill,” said Wayne Thevenot, head of the National Realty Committee, a lobbying group for commercial real estate developers.

Tax writers are already looking at several business tax provisions that are expected to become obvious sore points by next year.

The crackdown on real estate tax shelters, for example, could be subject to revision, particularly since specialists are unsure how damaging the phase-out of current deductions for losses from many investments will be to existing real estate projects and their lenders.

Moreover, the drastic tightening of the corporate minimum tax, designed to prevent any profitable business firm from escaping taxes, could lead to wide disparities in the tax obligations of thousands of companies because of the new rule basing a key portion of the tax on an untested accounting procedure.

Despite the need to take a second look at many of the complex provisions decided upon in the waning hours of the tax conference, a wide variety of analysts doubt that Congress will turn its back on the tax bill after struggling with it for nearly two years.

“I think you are going to see low rates and the elimination of most tax loopholes enshrined in the nation’s tax code for years,” said Jeffrey Bell, deputy director of Citizens for America, a conservative grass-roots lobbying group. “Sure, there will be some changes, but I just don’t see any big movement for another major tax bill.”