Obscure Budget Provisions Could Have Big Impact

If President Bush’s budget were set to music, it would be a ringing symphony of tax cuts and credits, orchestrated to bring applause from voters listening closely in an election year.

But the composition has sour, ear-shattering notes for some special groups of businesses and investors--those who would suffer tax hikes and other penalties scattered through the budget.

These provisions are comparatively obscure--they don’t get the front-page headlines but are vitally important to the affected groups. Computer users, purchasers of annuities, Wall Street brokerages and big credit unions all face higher taxes.

Here is a roundup of lesser-known losers, and a few winners, in the Bush budget plan. All the changes require approval by Congress.

* More than 16 million individuals have annuity contracts with insurance companies, with the money accumulating tax-free until it is withdrawn to pay for retirement or college or other long-range uses. The Treasury now wants to tax the profits each year while the money is invested, a step that could wipe out the annuity business, says Gene Grabowski, a spokesman for the American Council of Life Insurance. The tax would affect annuities sold after Feb. 1.

* Corporations with life insurance policies for their workers can borrow against the policies to raise cash. The interest paid on the loans is tax-deductible. The Administration wants to eliminate the deduction, making it much less attractive for companies to provide life insurance as a fringe benefit.

* Brokerages on Wall Street and elsewhere, which have large portfolios of stock, calculate the value of their stock holdings for tax purposes at the original purchase price. The Treasury now proposes that taxes be paid on the year-end value of the securities.

When the market takes a big jump, as it did last year, the tax bill would increase enormously.

* Credit unions are exempt from federal taxes, giving them an advantage over banks and savings and loan associations. Today, big credit unions “frequently function more as full-service banks,” says the Treasury.

The budget would cancel the tax exemption for credit unions with assets of $50 million or more. If these big credit unions are forced to pay higher taxes, they would offer lower rates to their members on savings accounts and charge more for loans.

* The 3% tax on telephones now applies strictly to local and long-distance calls. The Administration’s budget says the tax should be applied to “digital data transmission,” which means computer and facsimile operations.

This would be a new and unexpected tax for all individuals and businesses busily sending data through millions of computers and fax machines. The tax also would be applied to calls on coin-operated phones.

* Federal civil servants who now contribute 7% of base pay to the federal retirement fund would be required to increase payments to 8% next year and 9% in 1994. Current contributions from workers and their agencies cover less than 50% of the cost of the pensions the workers will eventually collect.

* Two million state and local government workers, hired before April, 1986, are exempt from the Medicare payroll tax, 1.45% of earnings up to $130,200. They would be taxed and covered for the first time.

The winners in the Bush budget include parents of children in college, trade schools or graduate school. They would be allowed to deduct the interest paid after July 1 on student loans.

Workers whose companies help pay for their bus and rail bills would get a bigger tax break. The law now allows the worker to collect up to $21 a month from the firm without paying taxes. The Bush Administration would raise the tax-free ceiling to $60 a month “to encourage employees to use energy-efficient mass transit in going to and from work,” according to the budget document.

For those who adopt children who are hard to place because of age, or physical or mental handicaps, the special $1,500 deduction would be increased to $3,000.