Senate Panel Rejects Plan to Hike Medicare Payroll Tax

The Senate Finance Committee, struggling to follow through on a deficit-reduction agreement to raise $9 billion in new taxes this year, Wednesday all but ruled out the most controversial proposal affecting individuals.

Committee staff members said that the panel, meeting behind closed doors, rejected moves to eliminate the $43,800 annual cap on income subject to Medicare’s 1.45% share of the Social Security payroll tax. The committee had included such a provision in a tax bill that it had approved in October.

That suggestion--which faced strong opposition from the White House and many members of Congress--could emerge again during the committee’s deliberations, but it is no longer on the list of proposals “most actively on the table,” said a senior staff member, who spoke on condition of anonymity.

Telephone Tax Still Alive

Still on the list is a proposal to extend the 3% federal telephone tax, which is now scheduled to expire Jan. 1.

The Finance Committee is only one of several fronts where Congress is working to implement the deficit-reduction agreement, which was reached after weeks of painful negotiations between the White House and Congress. It seeks to chop $30 billion from this year’s projected $180-billion shortfall through spending cuts, higher taxes and other revenue increases.

Another facet of the deal--spending cuts--will face its first major test today in the House.

The cuts are to be included in a catchall spending bill that is likely to become a political mine field with the addition of a series of unrelated but controversial proposals, including amendments affecting broadcasting fairness and clean air laws.

House Majority Leader Thomas S. Foley (D-Wash.) predicted that the legislation would pass, but warned that the deficit-reduction agreement would encounter “some turns in the road, some bumps” before it ultimately becomes law.

Rep. Trent Lott of Mississippi, a member of the House Republican leadership, predicted that no more than a handful of GOP lawmakers would support the spending measure under consideration today.

He said of the Democrats who control the House: “That’s their bag of you-know-what, and they’re going to have to pass it. . . . There is no reason for any Republican to vote for this.”

President Reagan also weighed in against the bill, writing in a letter to House leaders that he would have “no hesitation in vetoing the measure” in its current form.

Reagan added that it was “imperative in my view” that the bill include humanitarian aid to Nicaragua’s Contras--a demand that House Democratic leaders have rejected. However, Republicans do not plan to try to add Contra aid to the spending measure, and many in Congress have expressed doubt that the President would follow through on his veto threat.

New Income Sources Sought

As part of the deficit-reduction plan, both houses have pledged not to increase income-tax rates, leaving the Senate Finance Committee to find other ways to raise revenues.

Many of the proposals under consideration by the panel also were included in tax legislation passed last month by the House.

Although most of the options under consideration would put the greatest burden on corporations and wealthier individuals, the idea of increasing Medicare payroll taxes was particularly controversial.

Half the increase in the Medicare taxes would be paid by workers earning over $43,800 a year and the other half would be paid by their employers.

In its October version of tax legislation, the committee also had approved freezing the maximum tax rate on estates and gifts at 55% rather than allowing it to fall as scheduled next year to 50%. That provision fell off the list of likely candidates for the new version of the bill.

Also dropped were several corporate tax increase proposals to which the Administration had objected, including one that would have repealed an accounting method that defers taxes paid by defense contractors and others who undertake long-range projects.

Finance Committee Chairman Lloyd Bentsen (D-Tex.) insisted that the panel was not allowing the White House to write the legislation.

“Knowing ahead of time those things that they strongly oppose is helpful in making a decision,” he said. But he added that the President’s veto power “is not exercised in this committee.”