Six Democrats Backing Capital Gains Tax Cut

Only a few days after taking office early this year, President Bush was told by several top advisers that Democrats in Congress were so opposed to lowering capital gains taxes that he should put off his campaign proposal for at least a year.

But today Bush’s decision to forge ahead anyway appears on the verge of producing a stunning victory and delivering a major political setback to Congress’ Democratic leadership.

A rump group of six Democrats on the House Ways and Means Committee is defying House leaders by supporting a plan sponsored by Rep. Ed Jenkins (D-Ga.) that would reduce the tax rate on most investment profits by 30% through the end of 1991 and adjust capital gains taxes in later years to take account of inflation. That is enough votes to provide--with the 13 Republicans on the 36-member tax-writing panel--a razor-thin, 19-17 majority in favor of a capital gains cut.

Democratic leaders, who only need to recapture one vote to defeat the capital gains proposal, are scrambling to delay a showdown in the committee, probably until next week, in hopes of turning around one of the rebels.

“We don’t have a guillotine in the Democratic Party,” House Speaker Thomas S. Foley (D-Wash.) said Monday. “Sweet persuasion, I hope that will be enough.”

Until now, Bush and congressional Democrats have emphasized cooperation rather than confrontation on issues such as child care, the environment and the budget. The capital gains vote is shaping up as the first real test of strength between the White House and Democratic leaders.

“The honeymoon is now over,” Rep. Robert T. Matsui (D-Sacramento) said. “The divisions between the two parties are coming to the forefront and now it is up to Foley and Bush to demonstrate who can win on a substantive issue.”

Foley conceded, however, that “we may not succeed” in stopping the capital gains tax cut in the key committee, which would set up a major confrontation this fall on the House floor. A capital gains tax cut would probably win approval in the Senate if it succeeds in the House.

Whatever the outcome, Bush has laid bare a deep split between Democrats’ traditional ideology of opposing special treatment for the wealthy and the party’s growing dependence on contributions from a host of business special interest groups, particularly real estate developers, that would benefit from the tax cut.

“We’ve got wealthy Democrats in this country too,” said a longtime supporter of a capital gains cut, Beryl Anthony Jr. (D-Ark.), who is a key party fund-raiser as head of the Democratic Congressional Campaign Committee.

The debate over capital gains marked one of the few clear differences between the Republican and Democratic candidates during last year’s presidential campaign.

Both sides agreed that a capital gains tax cut would generate some initial revenue gains for the government by encouraging investors to sell off some extra stocks and bonds that might otherwise remain in their portfolios untaxed.

But that’s where the agreement ended. Republicans have defended providing a special tax preference for profits on the sale of a wide variety of personal assets as a healthy spur to economic growth. They have contended that it would provide a long-run benefit to all Americans by encouraging additional savings and investment.

Leading Democrats, however, have denounced Bush’s proposal as a betrayal of the 1986 tax revision law, warning that it is an unnecessary giveaway to the rich that will reopen a host of tax shelters and end up as a serious long-term drain on the Treasury.

Although some Democrats were attracted by the money the tax cut could generate for deficit reduction and new programs, they were in the minority and had less clout.

Rate of 15% Urged

In his legislation, Bush proposed to cut the maximum capital gains rate to 15% from the current levels of 28% and 33%, and would require investors to hold assets at least three years to receive the special tax break. Until recently, the cut seemed doomed this year because of the firm opposition of Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.).

But in May, in an apparent effort to demonstrate his longstanding friendship to Bush, Rostenkowski floated the idea of a temporary rate cut as part of the fiscal 1990 package for reducing the budget deficit. Rostenkowski quickly retreated in the face of adamant opposition from members of his party, but he has been unable to pull back the proposal ever since.

Defecting Democrats have embraced the tax cut--particularly a temporary one--with the thought of financing a major $16-billion expansion of aid for the working poor. And most of those supporting the capital gains measure come from the South, where timber and farming interests that would benefit from the rate cut are particularly strong influences.

“He may not have intended it, but Rostenkowski is ending up looking like George Bush’s water boy on this,” one bitter Democratic adviser said.

Rich Get Most Capital Gains

A lot of money is at stake in the dispute. About $327 billion in capital gains were reported in 1986, according to the most recent tax data, and a whopping one-third of that total went to the tiny number of taxpayers with incomes of more than $1 million. More than 80% of all capital gains go to the richest 10% of taxpayers--those who earn more than $50,000 a year.

Now, capital gains are taxed at the same rate as ordinary income, which means that most profits are taxed at the top rate of 28%, but some affluent taxpayers pay 33% because of special provisions in the code.

As the debate comes to a head, Administration officials have been enjoying watching the Democrats squirm ever since Rostenkowski’s blunder.

“I think the odds have been moving in our direction steadily over the past few weeks,” a senior White House aide said.