Senate Democrats Seek to Block Capital Gains Tax Cut

One day after the House voted to back a temporary reduction in the tax on capital gains, the battle moved to the Senate on Friday as Democrats vowed to tie up the tax cut in the Finance Committee.

Democrats hope that the Finance Committee will send to the Senate floor a bill that replaces the capital gains tax cut with an extension of the tax break for individual retirement accounts. That would make it easier, they believe, for the full Senate to reject the capital gains tax cut, which could reach the floor as an amendment.

“I think there is a reasonably good chance we’ll be able to prevail here,” Senate Majority Leader George J. Mitchell (D-Me.) told reporters.

The key to the Democratic strategy is a Senate rule that might require the capital gains measure--because it would increase future budget deficits--to win 60 votes on the Senate floor rather than a simple majority of 51.

A potential swing vote on the Finance Committee is Sen. David Pryor (D-Ark.), who said Friday that he is seeking a compromise on capital gains that might provide a tax break only for profits from financing new ventures. Pryor expressed doubts about the House-approved capital gains measure.

About 10 to 15 Democrats in the Senate, including Alan Cranston of California, the deputy majority leader, also are working together in an effort to develop a compromise capital gains tax cut.

Treasury Secretary Nicholas F. Brady, appearing before the Senate tax panel Friday, lost no time in attacking the Democrats’ alternative to the Administration-backed capital gains tax cut.

Brady criticized the proposal by Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) to provide a 50% deduction for contributions to individual retirement accounts by taxpayers who are ineligible for IRA deductions under current law because they earn too much money.

He charged that Bentsen’s proposal, which would also allow penalty-free early withdrawals from IRAs to buy a first home or to pay for college expenses, would provide too many benefits to upper-income Americans without necessarily increasing national savings. Democrats have leveled that same charge at the Administration’s capital gains tax plan.

Brady said also that Bentsen’s IRA plan would drain government revenues. “The Administration cannot support the 50% proposal because of its cost,” Brady said. “In the current environment requiring budget stringency, we do not have the funds to pay for such an expenditure.”

Bentsen plans to present his own tax proposal Monday to the Finance Committee, including the IRA expansion but without any capital gains tax cut.

To make up for the lost revenues, Bentsen is expected primarily to recommend adding or extending some small taxes or eliminating a number of small tax breaks.

Most of Bentsen’s expected proposals echo measures already included in the House-backed bill. Among them are a tax on ozone-depleting chemicals, limits on refunds to companies involved in leveraged buyouts and extension of airline and telephone taxes that are now scheduled for repeal.

The plan includes, aides said, an increase in the international air passenger departure tax, a new $3-a-passenger tax on commercial cruise ships, a speedup in the collection of payroll and gasoline taxes and a host of other relatively narrow measures.

Finance Committee Democrats, returning Brady’s fire, took the Administration to task for supporting the House-backed capital gains tax cut. The temporary tax cut, they said, would not boost investment and would mask its long-term revenue loss behind a brief spurt in tax receipts.

Under the bill backed by the House on Thursday, the top rate on long-term capital gains held more than a year would drop to 19.6% from the current maximum of 33% for assets sold between Sept. 14, 1989, to Dec. 31, 1991.

Starting in 1992, the tax rate on profits from the sale of stocks, real estate and most other assets would rise to 28%, but only profits that exceed future inflation would be taxed.

“I think it’s sheer budget gimmickry,” Bentsen said, warning Brady that the capital gains measure could have a “destabilizing effect on the market.”