House Panel OKs Major Tax Hikes to Reduce Deficit : Budget: The bill takes $246 billion out of Americans’ pockets, cuts $54 billion in spending over 5 years. House passage is likely for the revised version of Clinton’s plan.

In a major advance for President Clinton’s economic program, the House Ways and Means Committee approved a bill Thursday that would produce one of the biggest tax increases in history along with spending cuts designed to reduce the deficit by $300 billion.

The measure, which cleared the Democrat-dominated panel on a 24-14 party-line vote, would, if Congress approves, raise rates on top-bracket income earners, impose a new energy tax that would be heavily felt by middle-income Americans and increase an array of business taxes. Smaller firms would get new tax incentives to expand investments.

Overall, the legislation requires net tax increases of $246 billion--about $4 billion more than Clinton’s proposals--and spending cuts of $54 billion over the next five years. It also provides tax breaks of $80 billion during the period.

“This is the first step in getting our economy straightened out,” said Rep. Dan Rostenkowski (D-Ill.), chairman of the committee. “The President asked for major deficit reduction, and, as hard as it was, I think we have given it to him.”

With the House expected to consider the bill before its Memorial Day recess, Democratic leaders and the White House have begun a major effort to see that the legislation is approved.

The bill’s fate in the Senate is highly uncertain because of determined opposition from Republicans and some moderate Democrats. Sen. David L. Boren (D-Okla.), a key Democrat on the Senate Finance Committee--the counterpart of Ways and Means--said Thursday that he wants to rewrite the bill’s energy tax provisions.

Republicans on the House committee were effectively frozen out of efforts to design the bill, since the final version was fashioned behind closed doors by the Democrats on the panel. The Republicans protested in vain, however, and were rebuffed on seven attempts to amend the measure.

The committee’s bill provides about three-fifths of the five-year, $500-billion deficit reduction that Clinton hopes to achieve through tax increases, deep cutbacks in defense spending and the trimming of other federal programs. Republicans have insisted that Clinton cut spending first to reduce the deficit, and they have deplored tax increases as a threat to economic recovery.

The bill includes most of Clinton’s revenue-raising proposals, but Democrats on the House panel revised parts of his energy tax to pay for a series of sweeteners for farmers, aluminum producers, utilities, New England users of heating oil and others in an effort to smooth its passage in the House.

In another attempt to nail down wavering Democratic votes, the committee decided to repeal the much-criticized luxury tax on boats, airplanes, jewelry and furs and to soften the tax on high-priced cars. It also halved the President’s proposed $1-a-gallon tax increase on barge fuel, pared back a corporate tax increase to 35% instead of the 36% that Clinton had requested and expanded a tax break for real estate investors.

At the White House, Clinton signaled his approval of the revised package by telling reporters that the smaller increase in the corporate rate does not “reduce the overall contribution from the business sector.”

The bill retains the President’s request to raise the portion of Social Security benefits that are subject to income tax and sharply increased tax rates--up to 36%--for individuals with taxable incomes of more than $115,000 and for couples with taxable incomes above $140,000. Those taxable incomes, on average, are equivalent to total incomes in the neighborhood of $140,000 for individuals and $180,000 for couples.

Those with taxable incomes above $250,000 face an effective tax rate of 39.6%, excluding profits from the sale of capital assets.

“It’s one of those bills that nobody is happy with,” said Rep. Charles B. Rangel (D-N.Y.). “But I’m certain it’s going to pass.”

Republicans denounced the measure as Clinton’s “wallet-busting tax bill” but were defeated on party-line votes when they tried to remove the energy tax and revise other parts of the mammoth measure. Few, if any, GOP lawmakers are expected to vote for the bill when it comes to the House floor.

Since the bill apparently will be offered on a take-it-or-leave-it basis in the House--with no possibility of modifying it there--opponents are counting on the Senate to make major changes in the legislation, particularly in its energy provisions.

Under congressional rules for considering deficit-reduction measures, however, the bill cannot be killed by Senate filibuster--the fate that befell Clinton’s $16.3-billion stimulus package.

The bill puts a new tax on most forms of energy, raising the price of gasoline about 8 cents a gallon and adding about $2.25 a month to a typical electric bill. A basic tax rate of 28.6 cents per million British Thermal Units, or BTUs, would be imposed on most fuels.

While most of the controversy within the Ways and Means panel centered on the energy tax, the legislation also contains many other provisions aimed at business. It allows firms to deduct only 50% of business meals and entertainment, instead of 80% under current law.

Club dues no longer would be deductible and business firms would not be allowed to deduct their expenses for lobbying government officials and legislatures. Another provision would deny a deduction for executive pay over $1 million a year, with some exceptions.

Under one controversial change affecting retired and disabled persons, individuals with taxable income of $25,000 a year and couples with taxable incomes above $32,000 would have to pay federal taxes on 85% of their Social Security benefits, rather than the 50% under current law. No one who is not already paying taxes on Social Security benefits would be affected by this change, committee aides said.

In another provision aimed at shielding the “working poor” from the impact of the energy tax, the panel approved an expansion of the earned income tax credit that now applies only to families with children. The bill extends the credit to childless couples as well, at a revenue loss of $28 billion over five years.

The bill also gives tax incentives to business firms for hiring workers in blighted urban areas now called “empowerment zones” and “enterprise communities” at a cost of $5.4 billion over the next five years. It also makes permanent a program to give business firms tax credits for hiring unskilled workers and sets up a new system of youth apprenticeships for teen-agers who do not go to college.

Clinton’s proposal to give investment tax credits to corporations and small businesses was scrapped by the committee, as expected.

In one of the most significant business tax breaks, all firms would be allowed to deduct the first $25,000 invested in machinery or equipment in the year it is purchased, an increase from the $10,000 allowed under current law.

Meanwhile, the White House and Democratic congressional leaders decided against trying to revive a smaller version of the failed Clinton economic stimulus package by adding it to a supplemental spending bill that the House Appropriations Committee approved Thursday.

As approved, the spending measure, which would pay for the costs of the U.S. intervention in Somalia and expenses connected with enforcing a no-fly zone in the former Yugoslavia, does not include funds for an expanded summer job program or highway projects that Clinton had sought in the stimulus package.

Highlights of Tax Bill

Here are highlights of the tax bill approved Thursday by the House Ways and Means Committee:

INDIVIDUAL INCOME TAXES * Increase tax rates paid by higher-income people, raising the top-bracket rate from 31% to 36% this year for individuals with taxable incomes above $115,000 and couples with taxable incomes above $140,000. A surtax of 10% would be imposed on taxable income over $250,000, not including capital gains. * Remove the $135,000 cap on wages subject to the 1.45% health insurance tax. * Deny deductions for club dues. * Reduce deductible part of business meals and entertainment from 80% to 50%. * Raise taxable portion of Social Security benefits from 50% to 85%, generally affecting individuals with taxable incomes above $25,000 and couples above $32,000. * Repeal luxury tax on boats, airplanes, furs and jewels. Modify the luxury tax on high-priced automobiles. * Repeal diesel fuel exemption for personal boats. * Extend 25% deduction for self-employed health insurance through 1993.

BUSINESS TAXES * Raise the top corporate income tax rate from 34% to 35% for earnings above $10 million. * Deny deduction for lobbying expenses. * Allow an immediate deduction of $25,000 for investment in equipment instead of the current $10,000 limit. * Raise waterways’ fuel tax by 50 cents a gallon over the next five years. * Speed up corporate payments of estimated tax to 100% of tax liability. * Provide a “passive loss” tax break for real estate investors to permit offset of losses on rental property against other income not derived from real estate.

TAX INCENTIVES * Extend permanently the tax credits for research, employer-provided educational assistance, low-income housing and targeted jobs tax credit. * Provide targeted capital gains incentives for investment in small businesses.