Tax Hike Aimed at Businesses, Wealthy : But Conferees’ Plan Would Impose Levy on Vaccines for Children

Legislators Friday unveiled the details of a deficit-shrinking tax increase which is designed to raise $23 billion over the next two fiscal years, primarily from corporations and wealthy individuals.

In the package, the final details of which were negotiated late Thursday night and informally approved just before midnight by Senate and House negotiators, virtually the only item affecting the average taxpayer is a three-year extension of the present 3% excise tax on telephone service.

The tax is expected to raise $1.3 billion in 1988 and $2.3 billion in 1989. All provisions of the bill, which would take effect Jan. 1, are expected to raise $9 billion next year and $14 billion the year after.

Item Brings Veto Threat

In addition, the measure includes a little noticed provision that the Reagan Administration previously has warned would increase chances of a veto of the whole budget package, an excise tax on publicly mandated immunization vaccines for childhood diseases that would help indemnify manufacturers targeted by liability suits. The provision would raise about $150 million over the two years.

The tax would be $4.56 on each DPT (diphtheria, whooping cough and tetanus) vaccine inoculation, $4.44 on measles and mump shots and 29 cents on polio shots.

After days of intense negotiations capped by a 6 1/2-hour head-to-head negotiating session between Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) and House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), the House backed off on several business tax provisions that the Administration had warned would make a Reagan veto inevitable.

Chief among these was a proposal to make corporate mergers, friendly or hostile, virtually impossible. It would have denied corporate raiders the right to deduct from taxable income the interest on any funds borrowed to finance a takeover. In the case of friendly buyouts, no interest could have been deducted on amounts over $5 million borrowed to finance the takeover.

Tax on ‘Greenmail’

After protracted wrangling, the House dropped all those provisions, but the Senate accepted a proposal that “greenmail”--inflated stock pay-outs to buy off raiders--should be subject to a 50% excise tax that would not be deductible from taxable income.

In addition, the House backed off from a proposal to tighten the existing 20% corporate minimum tax.

In partial return for those concessions, the House position was adopted on the maximum estate tax rate, freezing it at the present 55% for five years instead of permitting it to decline to 50% next year, as envisaged in the 1981 tax revision law.

The Senate accepted also a House proposal to limit deductible homeowner interest to mortgages of $1 million. Mortgages on first and second homes, including boats and motor homes, would be totaled to compute the maximum allowable deduction. In addition, deductible home equity loans would be limited to $100,000, but there would be no restrictions on the use of the money, which, under present law, must be used for home improvements and medical or educational expenses.

Defense Contractor Rules

Also, the House-Senate conferees modified a House proposal that would have required defense contractors to pay all taxes due on multiyear contracts according to the percentage of the contract that is completed in any given year. Under current law, the firms can defer 60% of the tax due until the contract is completed. Under the compromise formula, contractors would be liable for 70% of taxes due on that proportion of the contract that had been completed in any given year. The compromise would approximately halve the revenue gain estimated by the House to $1.2 billion over the two years.

Other provisions of the tax package would:

--Relax slightly the new rule imposed last year requiring taxpayers to pay a penalty if their withholding or quarterly estimated tax payments this year totaled less than 90% of what they owed. The old rule of 80% will remain in effect for this year, with the 90% rule effective next year.

--Narrow a 1986 provision under which estates of some wealthy corporate executives could avoid the estate tax on stock sold to employees. Closing the loophole would recapture an estimated $2.8 billion over the two years.

--Deny the child-care credit for expenses of overnight camp. The credit originally was designed to benefit parents who have to pay for child care so that they can work. It would raise an estimated $117 million over the two years.

Social Security on Tips

--Require restaurant employers to pay Social Security taxes on all cash tips received by their employees. The provision would bring in $465 million in the two years.

--Extend through 1990 the 0.2% temporary unemployment tax on employers, bringing in $1.7 billion over the two years.

--Extend Social Security taxes to weekend drill pay earned by military reservists, to the pay of some farm employees, workers employed by their spouses or parents and to premiums on employer-financed group-term life insurance policies above $50,000, bringing in $444 million in two years.

--Deny the foreign tax credit and tax-deferral benefits to income of U.S. companies that is earned in South Africa. The provision would increase revenues by $43 million in two years.

--Require doctors, entertainers and other professionals who form personal service corporations to pay a flat 34% rate on all taxable income, bringing in $200 million in the two years.

--Require wholesalers, rather than retailers, to collect taxes on diesel and special motor fuels, bringing in $445 million in two years.

--Deny the tax-deferring cash method of accounting to family-owned farming corporations with gross receipts exceeding $25 million a year, bringing in $69 million two years.

--Increase the payroll tax that finances part of the Railroad Retirement program to bring in $326 million over the two years.