NEWS ANALYSIS : Not Always Easy to Get a Bill Out of the Woods : In a Typical Case, Capital Gains Measure Had to Be Steered Though Forest of Timber Interests

Tree owners will undoubtedly be grateful to Sen. David Pryor (D-Ark.).

As the narrowly divided Senate Finance Committee neared its showdown over capital gains taxes earlier this week, Pryor was a crucial swing vote. Because he represents a state where timber interests carry a lot of political clout, lawmakers seeking to woo him used an appropriate bait--tax breaks worth hundreds of millions to timber owners.

The bidding war over Pryor’s vote, which repeated methods used last week in the House capital gains fight, illustrates the importance special interests play in shaping legislation with supposedly broader goals in mind.

The estimated 8 million tree farm owners in 26 states are represented by a bipartisan forestry caucus of 121 lawmakers. The caucus has grown into one of the most potent political forces in Congress. Indeed, the White House was so impressed with its ability to sway lawmakers that President Bush went out of his way during the House battle to meet with a group of tree owners and visit a picturesque Maine timber operation--with network television cameras in tow.

In the Finance Committee showdown, Sen. Bob Packwood (R-Ore.) led the GOP fight for a capital gains tax cut. His package pointedly included two extra tax breaks targeted primarily on timber owners.

Not to be outdone, Chairman Lloyd Bentsen (D-Tex.) added two others to his competing tax plan. The Bentsen plan focused on providing an extension of tax deductions for individual retirement accounts instead of the capital gains tax cut advocated by Bush.

Pryor, who earlier had expressed interest in a compromise over capital gains, ultimately lined up behind Bentsen’s package. It was approved by the committee when Packwood’s capital gains proposal lost by the narrowest of margins on a 10-10 tie vote.

But the battle is not over. The tax bill now moves to the Senate floor, where a showdown between capital gains and IRAs is expected this weekend. No matter which way the vote ends up, though, timber interests can’t lose.

Income Averaging

Under the Bentsen bill adopted by the Finance Committee, timber owners would get relief from anti-tax-shelter rules, providing them with an estimated $140 million in tax benefits over the next five years. Moreover, tree farmers would be the chief beneficiaries of a five-year, $295-million provision to restore income averaging to all farmers.

Packwood’s capital gains package, which is expected to challenge Bentsen’s plan on the Senate floor, also takes aim directly at timber state lawmakers like himself. One provision, designed to overturn an IRS ruling, would allow immediate write-off of fertilizer expenses used to grow timber. At the same time, Packwood added a lower corporate capital gains rate of 27.9% to the proposal. However, the limit applies only to assets that don’t generate profits unless held at least eight years--assets like trees.

“Would that have anything in common with the fertilizer provision?” wondered Sen. John C. Danforth (R-Mo.), whose question was met by general laughter.

Packwood pulled no punches in his reply. “For timber,” he said, “this is the best provisions they are likely to see.”

Belatedly, lawmakers are now expressing second thoughts about the timber and other special interest provisions added to the tax bill. Pryor, in a Senate speech Thursday evening, acknowledged that he was one of the prime beneficiaries of what he called the committee’s “feeding frenzy,” adding: “We did not act responsibly.”

And Senate Majority Leader George J. Mitchell (D-Me.) suggested Thursday evening that lawmakers might try to remove many of the unnecessary tax breaks from the overall budget bill.

Ironically, the timber industry was not supposed to benefit from the capital gains cut. Bush’s original tax measure provided a lower tax rate exclusively for stocks, bonds, and residential real estate.

But then the politics of Capitol Hill took over. Rep. Ed Jenkins (D-Ga.), a timber-state lawmaker, fashioned a capital gains proposal that would cut the rate to 19.6% only through 1991, but also extended the tax break to timber, commercial real estate and most other assets. With the White House approach dying on the vine, Administration officials “saw this was the best vehicle in town” Jenkins said, “and they decided to ride it.”

Indeed, they did. White House budget Director Richard G. Darman, the architect of the Administration’s capital gains strategy, became an unabashed convert to the timber cause.

“A vote against capital gains,” Darman told reporters just before the House balloting, “is a vote against farmers, small owners of timber stands, people who raise Christmas trees. . . .”

Wide Margin

After winning on a 19-17 vote in the House Ways and Means Committee, Jenkins’ package prevailed on the House floor by a surprisingly wide margin--239 to 190. And of the 63 Democrats who bucked their party line and voted with the majority, more than half represented timber districts.

Not all lawmakers from timber states see the House measure as a plus. Rep. Les AuCoin (D-Ore.) is a long-time supporter of lower capital gains taxes but he voted against the Jenkins measure because he worries that it will encourage timber owners to decimate their forests in a rush to take advantage of the temporarily lower rate.

“We need something that encourages long-term investment rather than reaping short-term windfalls,” he said.

But Rep. Ron Wyden, also an Oregon Democrat, backed the bill as the best way to restore a special tax advantage for capital gains. “I would have voted for this if it didn’t have a stick of timber,” he said.

Wyden, however, had little to worry about. Even the alternative plan advanced by House Democratic leaders would have kept the anti-tax-shelter timber provision, which Wyden proposed as a way to encourage private wood lot owners to replant their forests.

“This is something that has across-the-board support from environmental groups,” Wyden said. “I don’t see this as special interest legislation.”