Senate Seeks Deal to Delay Vote on Capital Gains : Would Strip Tax Cut From Deficit-Reduction Bill; Action Could Aid Passage

Senate leaders, apparently boosting chances that Congress will ultimately enact a capital gains tax cut, neared agreement Friday night on a plan to delay a vote on President Bush’s capital gains proposal for several weeks.

After a day of negotiations, Senate Republicans expressed support for a Democratic offer to strip the tax issue from urgent legislation designed to trim the budget deficit. Instead, taxes would be considered separately in several weeks.

“We are moving toward an agreement,” Senate Majority Leader George J. Mitchell (D-Me.) said Friday evening.

Because of the special rules that apply to debate of the deficit reduction bill, 60 senators would have been required to approve a capital gains tax cut as a part of that legislation. But, as part of a separate bill, a capital gains tax cut would need only a majority of senators voting--a maximum of 51 if all 100 were present.

House OK Needed

The chief remaining obstacle to cinching the deal was the support of House leaders for a plan for a separate vote on the capital gains measure. Senate and House leaders scheduled a meeting for this morning to try to complete a deal.

Earlier Friday, Bush had expressed opposition to any arrangement that would put off a showdown on his capital gains proposal.

“Capital gains is vital,” Bush said before meeting to discuss the situation with Senate Republicans on Capitol Hill. “It’s not an extraneous matter with me.”

Earlier this week, in a session that stretched into the early morning hours of Wednesday, the Senate Finance Committee rejected Bush’s capital gains tax cut--already approved by the House--in favor of a Democratic plan that would make individual retirement accounts more appealing for millions of taxpayers.

Dozens of Tax Breaks

At the same time, the committee loaded its bill with dozens of extra tax breaks worth billions of dollars to wealthy individuals and specific business interests.

Senate Democrats, apparently embarrassed by the widespread publicity given to the panel’s late-night largess and uncertain whether they have the votes to defeat Bush’s capital gains proposal, argued that the only way to approve a deficit-reduction bill quickly was to strip it of its controversial tax measures.

Democrats charged that Bush’s initial insistence on pressing the capital gains cut guaranteed that Congress would not complete the deficit reduction bill before Oct. 16. That is when automatic spending cuts are supposed to take effect if Congress has not pushed the projected deficit below the $110-billion target of the Gramm-Rudman budget law.

“The choice is up to the White House,” said Senate Budget Committee Chairman Jim Sasser (D-Tenn.). He said that those who will suffer from the automatic cuts include Medicare recipients, farmers and students with college loans.

Technically, the government has been operating under the specter of the Gramm-Rudman ax since the 1990 fiscal year began last Sunday. But most government agencies, expecting Congress to restore funds to compensate for any automatic spending cuts, are planning no significant cutbacks.

The capital gains tax cut became part of the deficit reduction bill because, by most estimates, it would actually add to government revenues in its first two years. This is because it would encourage the sale of assets that would otherwise be held, thus producing tax revenue now.

Under the impending agreement, Republicans apparently will support the Democratic plan to rush through a simplified deficit-reduction measure in return for a Democratic promise to guarantee a separate vote on cutting the capital gains rate, one of Bush’s key campaign pledges.

Although the capital gains tax cut lost in the Finance Committee on a 10-10 tie vote, Bush appears to have the support of a majority of the full Senate.

Capital gains are profits from the sale of assets. Under current law, they are fully taxed at the same rates as other income, up to a maximum of 33%.

Bill Slashes Tax Rate

Under a bill passed by the House Thursday, the top rate on most capital gains would be cut to 19.6% through the end of 1991. Then the rate would rise to 28%, but only gains beyond the inflation rate would be taxed.

In the Finance Committee, Sen. Bob Packwood (R-Ore.) offered a permanent capital gains cut. With the support of the White House, he proposed that the capital gains tax rate vary with the length of time the investment was held.

Investors who sold after Oct. 1 would be allowed to exclude 5% of the profit on assets owned at least one year, even if the assets were acquired before the new law took effect. The exclusion would increase by 5 percentage points for each additional year of ownership, up to a maximum savings of 30% on assets held at least six years.

Packwood’s plan, which was defeated by the 10-10 vote, is expected to be the starting point for whatever capital gains plan the Senate considers.

Whether or not the Senate accepts a capital gains tax cut, its tax and spending measures will have to go to a conference committee to settle significant differences between the House and Senate versions of the deficit reduction legislation.