House Votes Cut in Capital Gains Tax : Major Victory for Bush; Democrats’ Alternative IRA Proposal Is Rejected

President Bush won a major victory on one of his key campaign issues Thursday as the House voted by a surprisingly wide margin of 239 to 190 to cut the capital gains tax rate sharply.

In a dramatic showdown that had been expected to produce a close vote, the House defeated a Democratic alternative that would have raised taxes on the wealthy and expanded the availability of deductions for individual retirement accounts.

The capital gains measure would reduce the tax on profits from investments in stocks, real estate and most other assets to a maximum of 19.6% through 1991, from a top rate of 33% under current law, with an effective date of Sept. 16. Under the plan, the capital gains rate would increase to 28% starting in 1992, but profits that resulted from future inflation would not be taxed.

Called Stimulant to Growth

Republicans hailed the capital gains tax cut as a victory for those who believe that it will stimulate economic growth by providing an incentive for individuals to create new businesses.

“The Democratic leadership believes in redistributing the wealth. The bipartisan coalition believes in creating wealth,” said House Minority Leader Robert H. Michel (R-Ill.). He attacked Democrats for engaging in the “rancid rhetoric of class warfare.”

But Democratic leaders repeatedly hammered away at the tax cut as a giveaway to the rich that would do little to spur long-term economic growth and would widen the budget deficit in future years.

“You’ll be voting to give $25,000 a year on the average to . . . the wealthiest families in America,” said House Majority Leader Richard A. Gephardt (D-Mo.), who received a standing ovation from Democrats for a speech that ended the debate.

The proposal, sponsored by Democratic Rep. Ed Jenkins of Georgia and Republican Rep. Bill Archer of Texas, was supported by 175 Republicans and 64 Democrats. Only one Republican, Doug Bereuter of Nebraska, voted against the White House, which lobbied heavily for the capital gains tax cut.

Bush, in a telephone call to Archer, praised Republicans for a job “well done,” and, in an echo of President John F. Kennedy’s rhetoric, said that the tax cut would help “get the country moving again.”

The capital-gains measure is one of several divisive issues attached to a broad $16.6-billion deficit-reduction bill that lawmakers will continue to debate next week. Once it passes the House, the bill moves to the Senate, where the capital gains tax cut has a good chance of winning, despite stiff opposition from Democrats.

“The Senate leadership feels as strongly as our leadership does,” said House Speaker Thomas S. Foley (D-Wash.). “This isn’t the end of this process. It’s the beginning.”

Bentsen Readies Plan

Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) plans to fight the capital gains cut with a measure that expands IRAs.

Even Rep. William H. Gray III of Pennsylvania, the third-ranking Democrat in the House, conceded that the unexpected strength of the coalition of Republicans and mostly conservative Democrats who supported reducing capital gains taxes puts “tremendous pressure on the Senate.”

A Bentsen staff member acknowledged that the Senate is traditionally more sympathetic to lower capital gains tax rates than the House but said that the influential chairman of the Finance Committee will oppose it because he “believes strongly that we cannot afford both IRAs and capital gains.”

Several lawmakers, however, predicted that Congress could end up approving both a capital gains tax cut and restoring at least a partial IRA tax deduction for millions of upper-middle-class taxpayers who lost the tax break in the sweeping 1986 tax revision law.

After the vote, Archer told reporters that Republicans, now counting on Congress to approve the measure later this year, plan to follow up their expected victory with a proposal in 1990 to make the temporary 19.6% capital gains rate permanent. “We have our foot in the door,” he said.

White House Budget Director Richard G. Darman also has stated that the Administration plans to return to Congress with a plan to prevent the capital gains rate from rising to 28% in 1992.

Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee, said that the capital gains cut “savages tax reform.”

Rostenkowski, whose committee previously approved the capital gains cut by a slim 19-17 vote over his opposition, said that lower capital gains taxes are “a temporary feel-good gimmick” that will lose money in the long run.

Because of the expected increase in transactions in stocks, bonds, real estate and other assets that would stem from the reduction, the plan is expected to raise about $9.4 billion in the first three years. But after that, tax analysts believe, it would lose about $5 billion a year.

Rostenkowski charged that Bush “persists in the blind pursuit of shallow political victory” and is promoting “a fire sale” by encouraging wealthy Americans to sell assets now to take advantage of temporarily lower tax rates.

It was Rostenkowski, however, who first opened the door to the capital gains cut in early June when he floated a trial balloon by suggesting a temporary capital gains tax cut as a means of meeting a budget requirement to raise government revenues next year.

Trying to work out a compromise with Bush, an old friend who once served on the Ways and Means Committee, Rostenkowski ultimately lost control of the tax-writing panel and, together with several embarrassing losses this year on other issues, badly damaged his reputation as a shrewd politician.

Realizing they could not defeat something with nothing, House Democratic leaders hastily put together a package aimed at derailing the capital-gains measure approved two weeks ago by the tax-writing committee.

Democrats, recommending a tax increase on their own for the first time in years, proposed that roughly 600,000 taxpayers earning upwards of $200,000 a year should be required to pay a top rate of 33% rather than the 28% flat rate they currently pay.

Democratic Target

Although Republicans gleefully attacked the plan as revealing the Democratic fondness for tax hikes, Democrats hoped to pick up political backing from middle-income voters by tying it to a package that would have used the extra revenues to reduce the deficit and to broaden IRAs so that all taxpayers would receive at least a 50% deduction on contributions of up to $2,000. They also proposed to eliminate the 10% penalty on early withdrawals if the money were used to buy a first home or to pay family college expenses.

The Republicans, however, fought back by picking off dozens of Democrats, many of them Southern conservatives, who have strong ties to local businesses, timber and farming interests that stand to gain from the capital gains tax cut and other tax measures in the bill. Of the 64 Democrats who voted against their leadership, 42 were from the Deep South, while several others represented largely rural and timber districts.

Of the 45 California lawmakers in the House, all 18 Republicans lined up with the White House to retain the capital gains cut. Among the 27 California Democrats, four voted for a lower capital gains rate.

VOTE ON CAPITAL GAINS TAX CUT

WASHINGTON -- Here is how members of the California delegation voted Thursday when the House rejected a Democratic alternative to President Bush’s proposed cut in capital gains taxes. A “yes” vote meant a vote against the capital gains reduction:

Democrats for--Bates, Beilenson, Berman, Boxer, Brown, Condit, Dellums, Dixon, Dymally, Edwards, Fazio, Hawkins, Lantos, Lehman, Levine, Matsui, Miller, Panetta, Pelosi, Roybal, Stark, Torres, Waxman.

Republicans for--None.

Democrats against--Anderson, Bosco, Martinez, Mineta.

Republicans against--Campbell, Cox, Dannemeyer, Dornan, Dreier, Gallegly, Herger, Hunter, Lagomarsino, Lewis, Lowery, McCandless, Moorhead, Packard, Pashayan, Rohrabacher, Shumway, Thomas.