Plan to Hike Tax on Pensions Kept Alive in Senate

Senate Democrats Wednesday narrowly preserved President Clinton’s controversial proposal to increase income taxes paid by the nation’s wealthiest Social Security recipients, beating back Republican attempts to remove the provision from the Administration’s economic plan.

In a 52-47 vote, the Senate defeated an amendment offered by Sen. Trent Lott (R-Miss.) that would have reduced revenues in Clinton’s budget by $32 billion over the next five years--the amount the higher tax on Social Security retirees is expected to raise.

In a gesture to the voting power of senior citizens, however, the Senate also adopted a resolution urging the Senate Finance Committee to raise the income levels at which the higher taxes would take effect.

The narrow victory for the White House on the politically sensitive Social Security issue appeared to clear the way for final approval of the basic outlines of the President’s spending blueprint today without major changes.

Once the Senate completes that task, it will open debate on Clinton’s even more controversial $16.3-billion stimulus package, which faces greater resistance from conservative Democrats in the Senate than it did in the House.

Despite their loss Wednesday, Senate opponents of the tax increase for retirees said they may try again to remove the provision later this year when the Senate considers tax legislation to carry out the President’s program.

“I intend to bring it (the amendment) back,” Lott confirmed in an interview. “The American people really feel strongly about this and all we need to do is switch three senators and this tax will be knocked out.”

Terming the provision “clearly unfair,” he argued that it ultimately could affect Social Security retirees with annual incomes of less than $25,000.

Under Clinton’s proposal, individuals with annual incomes of more than $25,000 and couples earning more than $32,000 would be required to pay taxes on 85% of their federal retirement benefits. People in these income categories now pay taxes on 50% of their benefits.

The accompanying resolution approved by a 67-32 vote Wednesday urges the Senate Finance Committee to raise the threshold to $32,000 for individuals and $40,000 for couples.

Sen. Pete V. Domenici (R-N.M.) denounced the move as a “transparent fig leaf” to provide political cover for Democrats who voted against the GOP attempt to block the higher taxes on Social Security beneficiaries.

Senate Democrats also defeated two other attempts Wednesday to significantly alter the President’s plan, both by wider margins.

In short order, the Senate voted, 55 to 44, against a proposal by Sen. Phil Gramm (R-Tex.) to drop Clinton’s proposed tax increases and forgo an equal amount of new spending that the President requested. A substitute plan by Senate Minority Leader Bob Dole (R-Kan.) to cut the deficit by $425 billion without raising taxes also was sidetracked, 57 to 42.

The Social Security provision has been the most difficult part of Clinton’s economic program for his allies in Congress to defend. Traditionally, Democrats have been staunch supporters of the Social Security system, and lawmakers of both parties have been reluctant to antagonize well-organized older citizens.

But the overwhelming vote in favor of raising the income thresholds apparently provides Democrats with the political cover that they needed to support the President’s budget plan.

As the Senate debate drew to a close, Federal Reserve Chairman Alan Greenspan cautioned against too much reliance on tax increases to reduce the deficit--an implied criticism of the Clinton approach.

At the same time, however, Greenspan described the government’s red-ink spending as a “malignant force” and praised actions taken by the President and Congress as “serious efforts to restore a measure of balance to our fiscal affairs.”

Testifying before the Senate Finance Committee, Greenspan said a relatively good economic performance over the next few years could keep deficits in check. But he warned that spending is projected to climb faster than the tax base.

If that happens, he said, holding down the deficit will require higher tax rates that would dampen long-term growth.

“Thus, there is no alternative to achieving much slower growth of outlays if deficit control is our objective,” Greenspan said. “Over the long run, it is important to recognize that trying to wholly, or substantially, address a structural budget deficit by increasing revenues is fraught with exceptional difficulties and is more likely to fail than succeed.”

The Federal Reserve official--who declined to comment on specific parts of Clinton’s program--suggested that Congress consider “sunset” legislation that would terminate spending programs on a specific date unless they are reauthorized by the House and Senate.

If federal outlays were systematically reconsidered, he said, the savings could be significant.

Greenspan also said he favors a constitutional amendment to require a large majority of each chamber to approve new spending programs or revenue increases.

“Combined with sunset legislation, such a procedure could probably go far to neutralize the obvious propensity of our political system toward structural deficits,” Greenspan said.