House Panel Says It Opposes Cut in Capital Gains Tax

The House Ways and Means Committee served notice Thursday that it will oppose President Bush’s plan for a reduction in capital gains taxes and also that it will resist changing a hotly controversial surtax imposed on Medicare recipients for protection against costs of catastrophic illness.

While Democratic leaders have signaled their opposition to the capital gains proposal, the position taken by the key committee, detailed in a letter to House budget negotiators, was the first formal gesture against it.

Because the Ways and Means Committee has the sole constitutional power to initiate tax legislation, its stand could be a decisive blow to the proposals’ chances.

Letter by Chairman

The committee’s views on tax issues were stated in a letter written by Ways and Means Chairman Dan Rostenkowski (D-Ill.) to California Rep. Leon Panetta (D-Carmel Valley), chairman of the House Budget Committee.

“The committee continues to insist that no fundamental change should be made to the Tax Reform Act of 1986,” Rostenkowski wrote. “The last eight years have witnessed the enactment of four major and several other revenue bills which significantly changed the federal income tax structure for both individuals and corporations.

“Given the scope and pace of these changes, the committee feels strongly that stability in the federal income tax structure is essential,” he added.

While he did not mention Bush’s proposal on capital gains taxes by name, committee aides said that it was the type of major change the panel wants to avoid for this year and next.

Reduction of the capital gains tax was one of the chief budget proposals Bush unveiled in his address to Congress Feb. 9. Bush advocated reducing that tax rate from 28% to 15% for stocks and other financial assets held for more than three years.

He contended that the change would bring in billions of dollars of revenue to the Treasury by stimulating investment, but Democratic critics said that it would be a windfall for the wealthiest 1% of all taxpayers.

In the letter, the committee also balked at demands from many senior citizens to repeal or modify the new Medicare coverage for catastrophic illness costs. The protesting senior citizens charged that it imposes too heavy a burden on the 40% of Medicare recipients who earn enough to pay taxes and would be subject to a special surtax to support the additional benefits.

Rostenkowski said that the new law--along with three other major bills passed last year--would be the subject of “oversight hearings” to see how it is being carried out, and that could give opponents a platform to demand its abolition or changes in the financing provisions.

But he said, “We do not anticipate any legislative activity modifying these laws, and we strongly urge that Congress follow through on the decisions made when these laws were enacted.”

On a related issue, the letter said that Bush’s proposed reductions of $4.3 billion for the Medicare program in the year starting Oct. 1 were “not reasonable” and should be reduced.

On the overall budget outlook, the committee said that many of its members--but not all--believe that revenue increases will be needed this year to bring the deficit below $110 billion and avoid an automatic, across-the-board cut in defense and most domestic spending programs.

“However, we all believe that the committee should not be required to report revenue increases . . . until there is significant bipartisan support for such an action,” Rostenkowski wrote.

In effect, the letter said that the Ways and Means panel will not consider tax increases unless President Bush reverses his long-held position against any new taxes.

“Finally, in the event that any revenue-losing proposals are considered by the committee, we believe that such proposals should be budget-neutral,” Rostenkowski added, indicating that revenue increases must be enacted to offset any revenue-losing measures.

“The committee firmly believes that deficit reduction must remain our highest priority,” he concluded.