Plan to Link Gas Tax Hike, Capital Gains Cut Dropped

It might have seemed a good idea at the time, but Administration officials and top lawmakers moved quickly Friday to squelch a proposal discussed with President Bush last weekend to increase the federal gasoline tax and reduce the capital gains tax.

“The economics of tying the two together may make sense, but the politics are dreadful,” one Administration official said on condition that he not be identified.

Some Administration officials were intrigued by the support of House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) for boosting gasoline taxes to help close the federal deficit. They urged Bush to consider proposing the gasoline tax hike in hopes of winning Rostenkowski’s approval of Bush’s cherished capital gains tax cut.

But a top aide to Rostenkowski sarcastically dismissed the approach as blatantly unfair to most Americans.

“It has a certain symmetry,” he said. “We raise the taxes on the poor and middle class and lower the taxes of the rich. That’s a hell of a deal for Democrats.”

The aide, who declined to be identified by name, said that Rostenkowski, whose committee must originate all tax bills, remains an advocate of higher gasoline taxes. He added, however: “Remember, Democrats are not for a gas tax. Dan Rostenkowski is.”

At the same time, Rostenkowski adamantly opposes cutting the capital gains tax on investment profits, which are currently taxed at the same rate as ordinary income.

Another obstacle to a deal is Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.), who has repeatedly insisted that he would oppose any additional taxes that might harm Texas oil interests.

Several major Administration officials, including Bush himself, Secretary of State James A. Baker III and Commerce Secretary Robert A. Mosbacher, also come from Texas. They too are predisposed against any measure that might harm the state’s still-ailing economy.

The possibility of combining a gasoline tax increase with a capital gains tax cut was discussed when Bush met last weekend at his Camp David retreat with some of his top economic advisers, private economists and business leaders.

“There was no consensus or agreement on any course of action to come out of those meetings,” said White House Press Secretary Marlin Fitzwater.

The Washington Post reported Friday that some conservative economists normally opposed to tax increases had urged Bush to accept a higher gasoline tax in return for a reduction in the top capital gains tax rate to 15%.

But Jude Wanniski, who attended the session and heads Polyconomics Inc. in Morristown, N.J., said the support at the session for higher gasoline taxes came from longtime advocates of deficit reduction rather than from supply-siders such as himself and Richard Rahn, chief economist of the U.S. Chamber of Commerce.

Wanniski, who is influential among conservative activists, acknowledged that he told Bush he could accept higher gasoline taxes if that was required to win approval of a lower capital gains tax rate. But he said he did not think it was necessary to make such a deal with Congress.

Instead, he suggested, the Bush Administration should work with Democrats concerned about Wall Street abuses by offering to tax profits from short-term investments held by pension funds, which are now tax-exempt.

While a few of Bush’s aides, including Michael J. Boskin, his chief White House economic adviser, have privately indicated interest in a gasoline tax hike, Administration officials have used every opportunity in public to quash the idea.

At a semi-private forum last Wednesday, White House Budget Director Richard G. Darman was asked directly about swapping a gas tax hike for a cut in the capital gains rate, one participant said. Darman reportedly ruled out such a swap as unnecessary.

And earlier this month, just after the White House announced its fiscal 1990 budget agreement with Congress, Secretary of the Treasury Nicholas F. Brady was asked on a television interview show whether the Administration was willing to consider higher energy taxes to raise the revenues called for under the agreement.

“No, no,” Brady said, “we’re not willing to consider that.”