Democrats on House Panel OK Tax-Cut Package; Battle With White House Looms

Democrats on the House Ways and Means Committee completed work Friday on their alternative to President Bush’s tax-cut package, prompting a veiled veto threat from the President and paving the way for an almost-certain election-year confrontation.

The Democratic package, nearly identical to a version outlined Thursday by committee Chairman Dan Rostenkowski (D-Ill.), would provide a larger middle-income tax cut than Bush has proposed, which would be paid for by raising taxes on the rich.

Democrats hope to embarrass the President, first by defeating the White House package and then by goading him into vetoing their tax-cut legislation at the peak of the election campaign. Bush has asked Congress to complete work on the tax bill by March 20.

He hardened the battle lines Friday, telling an audience during a campaign stop in Belcamp, Md., that “I don’t want to compromise--I want them to pass this,” referring to his own tax-cut package.

He urged voters “to tell Congress not to send me a package that I have to veto--one carrying a tax increase.”

At an impromptu news conference, Bush also accused Democrats of “trying to divide America, class against class” with taxes.

Approval of the Democratic package came after Ways and Means Committee Democrats, meeting in a closed-door caucus, rejected efforts by liberals to replace a tax credit of $200 per taxpayer for middle-income Americans with a tax credit for families with children.

Reps. Thomas J. Downey (D-N.Y.) and Marty Russo (D-Ill.) had proposed versions of the child credit on grounds that it would benefit families more than individuals or couples with grown children. But Rostenkowski insisted that the broader credit would have more appeal.

At the same time, in an effort to lure more Republican support when their bill reaches the House floor, committee Democrats sweetened an earlier proposal to reduce the taxes paid on capital gains, which are the profits from the sale of stocks or other assets.

Committee Democrats had considered a proposal Thursday to trim capital gains tax rates for those who invested in so-called “venture-capital” corporations and to distribute rate cuts to other investors, mainly middle- and upper-middle-income Americans.

They voted Friday, however, to provide some tax relief to all taxpayers who buy stock after this February, or who buy and hold venture-capital stock or securities for five years. They also removed all limitations on the income bracket a taxpayer must be in to qualify.

The $90-billion package would be paid for by increasing taxes on the rich. It would raise to 35%--from the present 31%--the maximum tax rate for earnings over $85,000 for individuals, $125,000 for heads-of-household and $145,000 for couples. It would also impose a 10% surtax on millionaires.

Bush’s tax-cut package, outlined in his State of the Union address last month, would be financed by changing the accounting rules for certain federal budgetary transactions and by reducing spending for some programs.

Although the Democrats’ new package contains many of the provisions that Bush proposed in January, it offers a far larger tax cut for the middle class and imposes higher taxes on the rich, proposals that Bush opposes.

The Democrats appeared pleased with their new package and by Bush’s reaction.

“We must be doing something right,” Rostenkowski said after hearing of Bush’s comments. “We’re irritating them at the White House.”

Rostenkowski argued at a press conference that the bill approved by the committee showed that “Democrats are thinking about the middle class,” while Republicans are playing to upper-income constituents.

“Fairness in the (tax) code--that’s the difference between Democrats and Republicans,” Rostenkowski said. He predicted that voters will be “as enthusiastic as we (committee members) are” about the contents of the Democratic package.

Senate Majority Leader George J. Mitchell (D-Me.) said on a TV talk show that he was likely to have only minor suggestions for changing the Democratic package.

The measure now goes to the House Rules Committee, which will set limits on debate and amendments for action by the full House later this month or early in March.

The Democrats’ plan will be pitted against Bush’s proposal, which was introduced by Democrats earlier this week.

Bush attacked the Democrats’ “scheme” Friday as he toured a housing development in Maryland during a trip designed to call attention to his proposal to offer $5,000 in tax credits to first-time home buyers.

Dressed in black cowboy boots, gray slacks and a brown leather jacket--and transported in a Chevrolet Suburban instead of the usual limousine--Bush was clearly trying to send a signal of empathy to middle-class voters.

When asked how a $150,000, four-bedroom house in the development compared to the White House, Bush began an answer but then stopped. Instead, he bought his own coffee, mingled with construction workers and admired the workmanship.

With his boots getting muddy as he made his way through $80,000 townhomes still under construction, Bush won praise from developers and home buyers, who told him that his plan would make housing more affordable and increase sales.

“Anyone who wants to buy a home like this, under my plan, would get a $5,000 tax credit,” Bush said, standing outside a row of homes where the signs read “Sold.”

He pointed to the proposal to counter Democrats’ suggestions that his plan favored the wealthy. “We don’t need any tax increases,” he said in denouncing the Democrats. “What we need to do is stimulate the economy.”

Democrats’ Plan: Relief for Middle Class

Democrats on the House Ways and Means Committee completed work on an alternative to President Bush’s tax plan. Here are some of the major elements:

For Middle-Income Americans A temporary tax credit amounting to 20% of the employee’s share of Social Security payroll taxes--to a maximum of $200 for individuals and $400 for couples--payable in cash to those who do not earn enough to benefit from a tax cut. Available only for three years. A waiver for those with individual retirement accounts, allowing early withdrawals of up to $10,000 of those savings, without a 10% penalty, to help finance first-time home purchases, education costs and medical expenses. The amount is double what Bush proposed in his Jan. 28 State of the Union speech. A tax credit for interest paid on student loans, to a maximum of $300 in most cases--or $500 if the interest equals 10% or more of the borrower’s income. Automatic adjustment for inflation of the $125,000 exemption for profits from the sale of a taxpayer’s principal residence for those over 55 years of age. The plan would also extend the exclusion to taxpayers who are permanently and totally disabled. Increase the amount of tax-free reimbursement for commuting expenses that an individual may accept from his employer to $60 a month for transit passes and extend the benefits for van-pooling and park-and-ride ventures. Reduce to $160 a month the amount of tax-free reimbursement for employer-provided parking. Extend for another six months a provision allowing self-employed persons to deduct 25% of medical insurance costs.

For Corporations A 1-percentage-point reduction in the current 34% corporate income-tax rate, in place of the faster depreciation write-offs proposed by President Bush, and a 1-percentage-point reduction in the Alternative Minimum Tax--now 20%--designed to force firms to pay some taxes. Provide new “enterprise zones” that would offer tax subsidies and wage credits for creating jobs. Extend the current tax credit for research and experimentation.

For Investors A complex reduction in taxes on capital gains--profits from the sale of stocks or other assets: All taxpayers would be able to adjust the purchase price of their assets for inflation when they calculate their profits at the time of sale. Those who buy stock after February, 1992, would be able to adjust the purchase price of their assets for inflation when they calculate their profits at the time of sale. Venture-capital bonus: The panel provided for a 50% exclusion--amounting to a special 14% effective tax rate, rather than the 28% top rate now in effect--for those investing in stocks of certain companies with gross assets of no more than $100 million.