Bush Budget Plan Designed to Foster Few Tax Changes

President Bush’s new budget plan is designed to provide “a still pond”--a stable tax environment--for businesses, consumers and investors, Treasury Secretary Nicholas F. Brady said Monday.

The new White House spending document offers a mild mixture of proposals recycled from last year, with unlikely prospects for approval from a Democratic Congress--and a conspicuous absence of major changes.

Although Bush once again is seeking a capital gains tax cut, a new family savings account and tax-free withdrawals from retirement accounts for first-time home buyers, these measures probably will be rejected by Congress, as they were last year.

Congressional strategists said the only proposals unveiled yesterday that seem apt to win passage are extension of the research and development tax credits and an energy credit.

With the exception of the capital gains plan, the Administration’s attitude is “let’s leave the (tax) code where it is for the time being,” Brady said Monday at a news conference where the budget details were disclosed.

Brady personally opposed a renewal of the proposal to cut taxes on stocks, bonds, real estate and other assets. But the White House overruled him and once again put a capital gains cut in the budget, anxious to mollify conservatives still angry over last year’s tax hike.

However, the proposal, which would set a top rate of 19.6% on profits from assets held three years or more, is unlikely to go anywhere in the Democratic Congress.

Bush has asked Federal Reserve Board Chairman Alan Greenspan to study the capital gains issue, which will further delay it from reaching a vote in Congress this year.

“There is enormous disagreement as to who benefits and who doesn’t,” Brady said. The Administration says a capital gains cut would stimulate new investments, creating jobs and generating $9 billion in new tax revenue over five years. Democrats say it would be a financial boon for rich people.

In addition to capital gains, the Administration renewed its call for a special family savings account, available for individuals with adjusted gross incomes of up to $60,000 and for couples with incomes of up to $120,000 a year.

An individual could contribute a maximum of $2,500 a year to the account, a couple could contribute $5,000. Contributions would not be tax-deductible as they are made, but withdrawals would be tax-free if the account were maintained for at least seven years.

The account lacks the appeal of an Individual Retirement Account, in which annual contributions are tax-deductible. But it offers quicker access to funds--the money can be withdrawn tax-free in just seven years, while an IRA holder must wait until age 59 1/2 to start receiving the money.

For first-time home buyers, the budget offers a special opportunity to get money for a down payment. IRA withdrawals are subject to income tax and a 10% penalty tax before age 59 1/2.

The Administration plan would allow a withdrawal up to $10,000 for persons who did not own a home in the previous three years. The money could be used as down payment for a house costing no more than 110% of the median home price in the area where the taxpayer lives.

Congress, constrained by a tight budget in which the deficit is headed for $300 billion, seems unlikely to adopt these proposals.

However, Congress probably would accept the Administration’s suggestions for continuing ideas already enacted into law.

Current law allows business a 20% tax credit for certain research expenses within the corporation and for grants to universities to do basic research. The Administration is asking Congress to make the credit, which has been renewed periodically, a permanent part of the tax law.

Stable laws promoting research “allow taxpayers to undertake research with greater assurance of the future tax consequences,” the Treasury said in an analysis of the budget proposals.

Two other proposals by the Administration also have good prospects for congressional acceptance.

The budget calls for a yearlong extension of the 10% tax credit for solar and geothermal energy. Equipment using the heat of the sun, or the internal heat of the earth, to generate electricity, or to provide heating and cooling, would qualify for the investment credit.

“Increased use of solar and geothermal energy would reduce our nation’s reliance on imported oil and other fossil fuels and would improve our long-term energy security,” the Treasury said.

The targeted jobs credit should be extended because “it might help economically disadvantaged people get jobs,” a Treasury official said.

Businesses get a tax credit equal to 40% of the first year’s wages paid to a member of a target group. The maximum credit is $2,400 a year. The targeted groups include: poor youths aged 18 to 22 and poor youths, ages 16 and 17, in summer jobs; welfare recipients; ex-convicts and poor Vietnam veterans.