NEWS ANALYSIS : Key Concessions Given to Businesses in Tax Bill

The controversial cut in capital gains taxes approved by the House Ways and Means Committee on Thursday may primarily benefit upper-income taxpayers, but the silent winner in the largely Democratic-drafted tax package is--of all things--American business.

In a major concession to corporations, the panel voted to repeal a controversial provision of the 1986 tax law, known as Section 89, aimed at preventing companies from granting their highest-paid employees appreciably better fringe benefits than those received by others on their payrolls. Repeal had been a major goal of the U.S. Chamber of Commerce and other business groups.

And the measure makes permanent a 20% tax credit for research and development that otherwise would have expired in December.

“There’s a lot of good stuff in this bill,” David Burton, manager of the chamber’s Tax Policy Center, exulted.

And some of the most significant rewards for U.S. corporations were not so much what the panel included in the tax bill as what the Democratic majority either omitted or refused to pursue.

For example, the committee scuttled proposed legislation that would have forced utilities to speed up refunds of roughly $19 billion in deferred taxes owed to customers. Rep. Robert T. Matsui (D-Sacramento), a member of the panel, withdrew the plan after it seemed headed for certain defeat.

And Dan Rostenkowski (D-Ill.), committee chairman, abandoned plans to try to tack on to the bill a provision that would have ended a deduction now being allowed mutual insurance companies for part of the dividends they pay to policyholders. The committee’s 19-17 vote to send the bill to the House floor still leaves it a long way from becoming law. Even proponents concede that the vote in the House on the controversial capital gains tax cut in the bill is likely to be razor-close.

Also, a partisan fight looms in the Senate, where Democrats, led by Senate Finance Committee Chairman Lloyd Bentsen of Texas, want to replace the capital gains tax cut with a plan to revive the tax deferral once allowed for all taxpayers’ individual retirement accounts.

The choice between the two could prove agonizing--and costly--for Senate Democrats.

“We’re beginning to see some signs that some would argue that you ought to do both,” said Mark A. Bloomfield, president of the American Council for Capital Formation, which is spearheading the lobbying for the capital gains tax cut.

Finally, the bill could spark a major brouhaha in the conference committee that will be appointed to reconcile the bills ultimately approved by the House and the Senate. The conference committee may well end up having to write virtually a new version of the bill.

“The fight’s not over” by a long shot, said Emil Sunley, tax analyst for Deloitte Haskins & Sells, a Washington tax firm.

What is particularly intriguing about the political dynamics of the Ways and Means decision is the defeat it marked for Rostenkowski--to the benefit of Republican President Bush. “It’s surprising the extent to which the chairman was rolled this year,” Sunley said.

Besides losing on the capital gains tax cut, which he opposed, Rostenkowski reversed himself on Section 89 and backed away from previous plans to limit leveraged buyouts of corporations.

Backed Cut in Surtax

He supported the successful effort in the committee to cut by half the surtax, now up to $800 a year, that the elderly will pay on their 1989 income taxes to finance Medicare’s controversial catastrophic care program. Rostenkowski was a vigorous proponent of the program when it was enacted last year.

Business did not win every fight in the Ways and Means Committee over the tax bill. The bill would slap a $1.25-a-pound levy on the manufacture of chlorofluorocarbons, which contribute to the destruction of the ozone layer and the trend toward global warming. And business had been hoping for an easing of the corporate minimum tax.

Moreover, in an effort to crack down on the exploitation of employee stock ownership plans during corporate takeovers, the committee voted to repeal a provision that allowed firms to exclude from taxation up to 50% of the interest they pay on loans to finance securities for such plans.

And the bill would end preferential tax treatment for the interest that banks earn from loans to Third World countries.

Besides the provisions affecting business, the tax bill contains a potpourri of proposals designed to raise $8 billion a year to help reduce the projected federal budget deficit for fiscal 1990. Gene Steurle, a tax watcher for Tax Notes, a professional journal, called it “another cats-and-dogs attempt to deal with policy.”

Other provisions in the bill would:

--Speed up the collection of payroll taxes by large corporations, effective in 1994. The measure would also accelerate the collection of the current 3% tax on long-distance telephone calls and the tax on airline tickets. The tax on telephone calls would become permanent.

--Crack down on tax write-offs for cellular telephones by requiring that a phone would have to be used for business at least half the time before a taxpayer could deduct the monthly payments. The measure would become effective next year.

--Add deferred compensation to the list of factors used for calculating how much individuals and corporations must pay in federal unemployment taxes.

--Limit the use of junk bonds by repealing tax benefits for those securities that enable deferral of cash interest payments until the bonds mature.

--Allow firms to use excess pension funds to finance medical insurance benefits for persons who are now retired.

--Levy a 3-cent-a-barrel tax on domestic crude oil as of Oct. 1 to finance a fund to help pay for the cleanup of oil spills, such as the one near Valdez, Alaska.

The outlook for all these provisions remains uncertain. “I don’t think anybody has a very solid count yet,” the Chamber of Commerce’s Burton said.