Rival Tax Plan Backers Brace for Political Test : House Democrats Wage Uphill Fight as Bush Advances Capital Gains Rate Cut

In a high-stakes game of political hardball over taxes, Democrats and Republicans in the House braced for an expected showdown vote today on the most bitterly partisan legislative issue in Congress this year.

House Democratic leaders, acknowledging that they still face an uphill fight, struggled to round up votes to defeat a White House-supported proposal to cut the maximum capital gains tax rate to 19.6% from the current 33% maximum. They were pressing their own alternative that promises to raise tax rates on the wealthy and restore incentives for individual retirement accounts that were taken away from millions of taxpayers in the 1986 tax revision law.

Test of Bush

The vote has emerged as a critical test of President Bush’s political strength and a challenge to new congressional Democratic leaders who generally had sought until recently to compromise with the White House rather than confront it.

“This is a defining issue for the President,” said Rep. Robert T. Matsui (D-Sacramento). “If he wins this one, the wimp image is gone for good. It establishes a certain level of political power.”

The maneuvering in advance of the vote is reminiscent of the summer and fall of 1981, when former President Ronald Reagan enlisted support from conservative Democrats to win approval of his sweeping economic program of tax and budget cuts. As Reagan did in 1981, Bush appears to enjoy a slim margin for his capital gains tax cut. But the contest is close and apparently still hinges on about 30 undecided House members.

Democrats Rally

Democratic leaders, who hold a 257-176 vote advantage in the House, convened a closed caucus to rally support against the capital gains tax cut, which they consider an unnecessary giveaway to the wealthy.

But a number of Southern conservatives, who long have supported lower capital gains taxes, are supporting the Bush plan. They are joined by several other lawmakers representing farming and timber districts where many of their constituents would gain directly from provisions of the tax bill approved by the House Ways and Means Committee two weeks ago on a 19-17 vote.

Rep. Sander M. Levin (D-Mich.), who is opposed to the capital gains plan, told reporters that he still does not see enough votes to block the cut. “I think we can catch up,” he added, however.

Republicans met with Richard G. Darman, director of the White House Office of Management and Budget, in their own strategy session. They attacked the Democratic plan, which would substitute more liberal IRAs for the lower capital-gains tax, as a ploy to raise taxes. The expanded IRAs--which would allow all taxpayers to receive at least a 50% deduction on contributions up to $2,000 and would permit penalty-free early withdrawals to pay for a first home or college education expenses--would be financed by a tax hike on families earning more than $200,000 a year.

Currently, families with taxable incomes from $75,000 to roughly $200,000 are subject to a marginal tax rate of 33%. But each dollar over the ceiling of about $200,000 is taxed at 28%. The Democratic alternative would tax earnings above the ceiling at the 33% rate.

“It’s exactly the kind of tax increase . . . (Democrats) proposed in 1984,” said Rep. Newt Gingrich of Georgia, the assistant Republican leader. “I think we’ll find the extra five or six votes necessary to win.”

Republicans contend that the tax cut on profits from investments in stocks, real estate and most other assets would stimulate the economy, encourage new businesses and end up boosting government revenues over the long run. Democrats dispute those claims.

The capital-gains cut is one of several divisive issues attached to the $16.6-billion deficit-reduction bill that the House is scheduled to debate this week and next. The bill also includes provisions to scale back the controversial catastrophic health care program for the elderly and to help poor families struggling to meet child care expenses. It is designed to meet the requirements of the Gramm-Rudman balanced-budget law for the fiscal year that begins on Oct. 1 and avoid automatic spending cuts in most federal programs.

Rule Wiped Out

In action Wednesday, the House overwhelmingly approved an amendment offered by Rep. Byron L. Dorgan (D-N.D.) to wipe out the controversial Section 89 rules that had been designed to prevent companies from providing fringe benefits for their top executives on a more favorable basis than for ordinary employees. Complaining that the rules are an unnecessary burden on business, lawmakers rejected a provision aimed at preserving at least a vestige of the anti-discrimation rules.

In seeking to put pressure against the Democratic tax plan, Bush has vowed to veto any tax hike that emerges from Congress even if it delays approval of the deficit-reduction bill well past the Oct. 15 deadline at which the widespread spending cuts would go into effect.

“A President has to use the tools at his disposal to accomplish the ends for which he was elected,” Bush said Tuesday. “And I plan to do exactly that.”