Tax Targets: Gas, Cigarettes, Liquor, Yachts

The budget deficit reduction agreement that President Bush and congressional leaders signed Sunday will hit American consumers squarely in their pocketbooks.

If Congress enacts the accord, cigarettes, liquor, gasoline and other fuels soon will cost more. The agreement also calls for a new luxury tax on expensive consumer products, ranging from cars and yachts to furs and jewelry.

Altogether, higher taxes would bring in $134 billion in new revenues over the next five years in a budget package designed to reduce federal borrowing by $500 billion over that same period.

In addition to higher levies on tobacco, alcohol and fuel, the package would require higher-salaried employees to contribute more to help finance the fast-rising costs of the federal Medicare program. Currently, workers pay 7.65% of their income up to $51,300 as Social Security withholding taxes, 1.45% of which is for Medicare. The new agreement would continue the 1.45% up to $73,000 in annual earnings.

Employees of state governments, who currently do not pay the Medicare tax or Social Security, would be brought into the system.

Most individuals or families earning more than $100,000 would pay more income taxes, with the government disallowing itemized deductions equal to 3% of the income above the $100,000 threshold. For example, if a taxpayer had an income of $150,000, the taxpayer would lose deductions equal to 3% of the $50,000 excess or $1,500 worth of tax writeoffs.

But the news isn’t all bad.

By reducing the federal government’s borrowing needs, the new budget plan is expected to bring down interest rates. “Long-term interest rates should be able to come down,” the President said at the White House Sunday afternoon.

The budget pact includes $182 billion in cuts in government discretionary expenditures, with defense spending accounting for the single largest share, $67 billion, in the first three years.

Cuts in popular benefit programs, such as Medicare and farm subsidies, would contribute another $119 billion in savings.

If the package is adopted by Oct. 19, as the President and congressional leaders hope, a 5-cent gasoline tax increase would take effect on Dec. 1, with an additional 5-cent hike next July 1. It is estimated that each penny increase in the gas tax will cost American drivers about $1 billion a year. The current levy is 9 cents per gallon. California drivers would be especially hard hit, since state voters on June 5 approved a doubling of the state gas tax, to 18 cents per gallon.

Separately, a 2-cent tax on each gallon of crude oil would take effect Jan. 1.

Joseph Lastelic, a spokesman for the American Petroleum Institute, said that higher gas taxes in the past have had very little impact on consumption and that the proposed new hikes would be no different. Lastelic also said that the higher taxes would hurt consumers in the West more than elsewhere around the country because they drive greater distances.

The deficit-reduction package calls for a 4-cent-per-pack cigarette tax increase on Jan. 1, and a second 4-cent increase in 1993.

The Tobacco Institute, the Washington-based lobbying group for the tobacco industry, said that the proposed hikes--coming on top of the current 16-cent-per-pack federal excise tax--would be regressive in that the increases would disproportionately hit the middle class and poor, who make up most of the nation’s 50 million to 60 million smokers.

The agreement also contains sharp tax increases for beer, wine and distilled liquor. It calls for doubling the current 16-cent per six-pack federal beer tax, which will cost beer drinkers an additional $1.5 billion a year, according to Jeff Becker, a spokesman for the Beer Institute.

The tax on wines would go up by 24 cents a bottle and on distilled liquor by $1.20 per gallon.

According to the Distilled Spirits Council of the United States, the current federal taxes on hard liquor are about $2 on a fifth of liquor or more than 25% of the cost of an average bottle.

The luxury tax calls for a 10% levy on the portion of the retail price in excess of $30,000 for cars, $5,000 for furs and jewelry, $100,000 for private airplanes, boats and yachts.

“This is real, not a phony smoke and mirrors deficit-cutting program,” Bush said of the budget agreement.

Times staff writers Tom Redburn and James Risen contributed to this story.