The Economy : Democrats Put Off Vote on Capital Gains : Hope to Use Tax Cut as Leverage in Budget Talks

House Democratic leaders, struggling to extricate themselves from a political quagmire, backed away Wednesday from an immediate confrontation with President Bush over his proposal to cut capital gains taxes after House Democrats failed to reach a consensus on the issue.

Rep. Ed Jenkins (D-Ga.), who has forged a slim majority on the tax-writing Ways and Means Committee in favor of a plan to cut the capital gains rate for most individual taxpayers from 28% to 20% through 1991, said he could win a showdown on the House floor, despite the all-out opposition of party leaders.

“I have a majority,” Jenkins told reporters after House Democrats met in private for about an hour and a half to debate the issue.

Although most Democrats remain opposed to a capital gains tax cut, several conceded that Jenkins is right: Enough Democrats are willing to join the solid bloc of Republicans to approve a capital gains tax cut.

Move to Delay Vote

“Unfortunately, the probabilities of a capital gains (cut) are looking better and better,” said California Rep. Robert T. Matsui (D-Sacramento).

Consequently, Democratic leaders moved to delay any vote until after Congress’ August vacation. Many apparently hope to force Bush to accept higher taxes in future budget negotiations in return for granting him a capital gains cut.

“I wouldn’t say it’s a club,” said Rep. Sander M. Levin (D-Mich.), but “the only way to solve the budget crunch coming next year . . . is to put everything on the table.”

A letter from capital gains opponents, led by Rep. Don J. Pease (D-Ohio) and House Majority Leader Richard A. Gephardt (D-Mo.), urged Democrats to hold out a capital gains rate cut as a bargaining chip with the White House.

“Our continuing massive budget deficit will require us to raise substantial revenues, probably as soon as next year,” stated the letter, signed by nine Democrats on the Ways and Means Committee. “Addressing capital gains now, separate from any larger budget negotiations, hands President Bush the single largest plum on his wish list without getting anything (in return). Instead of tough negotiations and compromise, we are looking at unilateral disarmament.”

Administration officials, however, are pressing lawmakers to approve a capital gains cut as part of a $5.3-billion revenue package called for in the budget that Congress is drafting for the fiscal year that begins on Oct. 1.

Supporters of Bush’s proposal contend that a lower tax rate for capital gains--the profits on investments in stocks, bonds, real estate and other assets--would encourage risk taking and spur economic growth. Most Democrats deride the idea as an unnecessary giveaway to the wealthy.

No Understanding

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), while holding out hopes of a future compromise that would include a plan to adjust capital gains to take account of inflation, expressed frustration that White House officials remain adamantly in favor of a rate cut.

“It’s very difficult for me to negotiate with the White House,” he said. “I don’t know who it is that can say: ‘OK, we’ve got an understanding.’ ”

Rostenkowski, continuing his effort to turn around at least one vote in his committee to block the Jenkins approach, met with Republicans Wednesday to discuss various alternatives.

Early reports Tuesday night suggested that Rostenkowski is recommending a compromise that might allow investors who sell an asset to subtract some past inflation from their capital gain as well as future inflation.

But House Speaker Thomas S. Foley (D-Wash.) told reporters that one feature of Rostenkowski’s plan that “merits consideration” is a 25% reduction in capital gains tax rates for assets held at least five years and a 50% reduction for assets held 10 years or more.

Democrats said Rostenkowski is playing with a number of alternatives in hopes of forging a new majority. “There is no plan at this point,” Levin said.

Rep. Jim Moody (D-Wis.) told reporters: “Time is on the side of the package that will be worked on by the chairman.”

But advocates of a capital gains tax cut were also convinced that they have the upper hand. “I’m for a capital gains differential, period,” Jenkins said. “It’s just a question of timing.”