Tax Hikes to Hit the Poor, Middle Class

Despite earlier vows to the contrary by both Democrats and Republicans, the tax increases and benefit cuts in the sweeping $500-billion federal budget plan will hit poor and middle-class Americans harder than the rich, new figures released Tuesday show.

Under the deficit-reduction agreement between the White House and congressional leaders, the poorest Americans would suffer a 2% loss of income and the most affluent 10% would have to accept only a 0.7% reduction, according to an analysis by the House Ways and Means Committee.

For example, taxpayers with average after-tax incomes of roughly $26,000 would be hit with an average of $338 in additional taxes and higher benefit costs, the committee calculated. That translates to an average 1.3% cut in income.

The bipartisan package, which would increase taxes by $134 billion and curb social benefits by $119 billion over five years, has come under attack by critics who contend that it places the greatest burden of deficit reduction on those with the least ability to pay.

“This proposal continues the unfairness and inefficiency of the policies of the last decade,” complained New York’s Democratic Gov. Mario M. Cuomo, who opposes the package. “For every $1 of progressive taxes on the wealthy, it raises $3 of regressive taxes on the middle class.”

The Ways and Means Committee analysis of the effect of the budget package is based on the overall impact on families and assumes that the tax changes continue through the full five years of the agreement.

Lawmakers who labored on the package for more than four months explained the result as the unfortunate but inevitable outcome of a last-minute compromise in which the White House dropped its insistence on a capital gains tax cut that would have largely benefited the wealthy, and Democrats agreed to abandon their effort to increase income tax rates on those earning more than $200,000.

As a result, the package, outside of defense spending cuts, relies largely on boosts in Medicare premiums and increases in consumption taxes on such items as gasoline, tobacco and alcoholic beverages.

The biggest impact would come from higher energy taxes. The federal gasoline tax, currently 9 cents a gallon, would rise to 21 cents by the middle of 1991. Beer, wine and distilled spirits would be hit by sharply higher taxes, and the cigarette tax would be increased by 50%.

“There has been some increase in regressivity due to the Republican insistence on higher gasoline taxes,” Senate Budget Committee Chairman Jim Sasser (D-Tenn.) said on Sunday when the agreement was announced. “That will be the single biggest problem in securing Democratic support.”

However, several Democratic lawmakers, such as Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee, and Rep. Leon E. Panetta (D-Carmel Valley), chairman of the House Budget Committee, long have advocated higher gasoline taxes to help reduce the deficit and discourage energy waste.

During the talks, Democrats aimed most of their fire at Bush’s proposed capital gains tax cut, counting on higher income taxes on the wealthy to offset any advantage for upper-income groups. When the White House dropped the tax cut plan, Democrats were in no position to argue that income tax rates should be boosted anyway to offset the disproportionate burden of consumption taxes on lower-income groups.

White House officials defended their decision to resist any explicit increase in income tax rates for the wealthy as part of a strategy to keep rates low for all Americans.

“The top rate, in fact, the rates of all American taxpayers were kept at what they were before the negotiations,” said White House Chief of Staff John H. Sununu. “Even though folks may argue that they only want to increase the top rates, it is like grabbing somebody . . . by the hair. Once you lift the top, the rest follows rather quickly.”

To prevent upper-income groups from escaping nearly all the pain of deficit reduction, budget negotiators decided to impose a 10% tax on luxury items and a limit on itemized deductions for those with incomes above $100,000. In addition, they boosted payroll taxes for those with incomes above $51,300.

The itemized deduction limit, which shaves deductions by $300 for each $10,000 in income above $100,000, has the same effect as increasing tax rates by about 1 percentage point for those affected.

The slightly regressive character of the final budget package runs against the position taken by Democrats throughout the talks that wealthy Americans should carry more of the burden of financing the federal government. Republicans, meanwhile, agreed that the package should do nothing to make the distribution of income worse.

“We have to have a balance,” Senate Minority Leader Bob Dole (R-Kan.) said in mid-September. “We have to have progressivity, and I think we’re going to have it.”

As it turned out, Dole was wrong.

THE NEW TAX BITE

Here is how tax and benefit changes contained in the new White House-congressional budget accord would affect Americans in various income groups.

Average after-tax Increased Percent change income level Income Cost (dollars) in income Poorest 20% $7,316 $147 -2.0% Second-poorest 20% $16,917 266 -1.6% Middle 20% $25,896 338 -1.3% Second-richest 20% $36,481 399 -1.1% Richest 20% $81,934 637 -0.8% Top 10% $112,042 777 -0.7% Top 1% $428,044 1,758 -0.4%

Here’s what Americans in various income groups spend and the amount by which taxes would rise under the new budget accord for three popular consumer items.

Total new Income Level Average income Gasoline Tobacco Alcohol taxes Poorest 20% $7,316 $565 $328 $303 $50 Second-poorest 20% 16,917 750 378 414 70 Middle 20% 25,896 945 432 594 90 Second-richest 20% 36,481 1,102 418 836 110 Richest 20% 81,934 1,170 390 1,248 130

Source: House Ways and Means Committee, Congressional Budget Office.