Administration Braces for Alarm Over Tax Plan

As it unveiled the fine print of its compromise budget blueprint Tuesday, the Clinton Administration sought to cope with a wave of confusion and alarm among affluent families and individuals who would not only be taxed at higher rates but would see those rates applied retroactively to Jan. 1.

Imposing the steeper rates on income earned since the beginning of the year, rather than beginning now, is an attempt to cover some of the revenue and savings lost in a blitz of last-minute deals cut in other areas to win needed votes.

But the provision triggered alarm and indignation among high-bracket taxpayers who may have to scramble to come up with 12 months worth of higher taxes in the five months remaining in 1993. Republicans and lobbyists, probing for weak points in the Clinton budget as Congress prepares to vote later this week, quickly zeroed in on the retroactivity feature.

And the Administration moved immediately to try to counter the attacks, even though independent tax experts indicated that the rhetoric and confusion may have outstripped the reality, at least for individuals and families.

“I think retroactive taxation’s the one that’s really going to trip them up,” declared Senate Minority Leader Bob Dole (R-Kan.). “When the American people find out how bad this provision is, it is going to change a lot of minds,” Dole said, asserting that nothing like it had ever been done before.

Making higher rates apply to the whole year when wealthy taxpayers have relied on the old rates for seven months is already causing disruptions in investment and spending plans among individuals and small businesses that pay income taxes at individual rates, critics contended.

In fact, however, the impact on most high-income taxpayers may not be severe and many--especially those with very large incomes and the services of tax accountants--acted months ago to protect themselves.

Clinton’s budget will impose a higher individual income tax rate of 36% on couples earning more than $140,000 in taxable income. Before deductions and exemptions, that translates into about $180,000 in gross income annually. Meanwhile, for those earning more than $250,000 per year, the legislation will impose a top effective tax rate of 39.6%.

Independent experts noted that only 1.5% of all taxpayers nationwide will be hit by the higher income tax rates and that only about 1% of all California households will feel the increased levies. Of the 13.8 million households in California filing income tax returns in 1991, only 130,000 had adjusted gross incomes over $200,000, the level at which the higher rates will begin to really bite.

And tax specialists in Washington said that it won’t have a drastic impact even on most of those families, including many professional couples whose combined incomes may push them over the threshold.

For example, a family of four with income over $200,000 will pay $1,308 more in taxes each year under the Clinton bill. Since that will be retroactive for all of 1993, they can increase their payments in the remaining months of the year or wait until next spring to pay the entire extra amount.

The White House on Wednesday offered assurances that wealthy taxpayers, most of whom pay estimated taxes in installments several times each year, will not be penalized for underestimating their taxes this year as a result of the new tax bill.

Clint Stretch, a tax policy expert at Deloitte & Touche in Washington, said that most wealthy taxpayers have been prepared by their accountants for months for the higher tax rates and the likelihood that it would be retroactive, and so should not be surprised.

“We started warning our clients about that last November,” said Stretch. “The number of people who have to pay these higher rates is very few, and most of them have already prepared for this.”

Meanwhile, another, smaller tax for the wealthy will also be retroactive: The change in estate tax rates, scheduled to rise from 50% to 55% on estates of more than $3 million, will be raised retroactive to Jan. 1.

Reaching back to Jan. 1 would generate more than $5 billion in extra federal tax revenues to help Clinton and congressional Democrats meet their deficit-reduction goal of nearly $500 billion over the next five years while funding social program at the levels they desire.

In addition to protecting Medicare and other entitlement programs from major hits, the Democrats want to fund an expanded tax credit for the working poor and tax incentives for job creation in the inner cities.

Rebutting claims by Dole and others that retroactive taxes are unprecedented, the White House issued examples, dating back to 1917, of new taxes that have been imposed retroactively. Congressional tax experts also noted that it was done at least once during the Ronald Reagan Administration when taxes were increased in 1982.

The retroactivity provision has resurfaced as a political issue in part because of the last-minute deal-making that has taken place over the last few days in the House-Senate budget negotiations.

In its original budget, the Clinton Administration proposed the Jan. 1, 1993, effective date for the tax and the House went along with it. The more conservative Senate pushed the effective date up to March 1.

Knowing that the final vote on the compromise budget package was sure to be extremely close, the negotiators made a host of concessions to win the backing of individual senators and representatives. Some of the deals reduced projected revenue; others increased projected government expenditures. To offset the fiscal impact of both without sacrificing the Administration’s overall goals, the conferees went back to the Jan. 1 effective date for the tax increases.

The provision allows the Administration to come closer to its target for the expansion of the earned income tax credit for the working poor, which will be increased by $20.8 billion and now represents one of the biggest single anti-poverty programs ever mounted by the federal government.

Key provisions in the tax and budget plan changed sharply even on Monday, as the congressional leadership was trying to put the whole budget agreement to bed.

Restaurant owners got a new tax deduction for Social Security taxes on waiters’ tips, in an attempt to placate Sen. Richard H. Bryan (D-Nev.), who has remained undecided on the budget and who was looking for a break for Nevada’s casino and entertainment industries.

Sen. Dennis DeConcini (D-Ariz.), who is also on the fence, won a break for middle-income retirees, who were spared higher taxes on their Social Security benefits. A new higher tax rate on Social Security benefits now will not apply to retired couples earning less than $44,000, while individuals won’t be taxed unless they make more than $34,000; both figures are higher than negotiators expected as late as this weekend.

A new tax on lobbyists, which Clinton has highlighted as one sign of his commitment to reduce the power of special interests in Washington, was sharply scaled back. Congressional tax experts said that the tax as it emerged from the negotiations will raise $500 million less than proposed in the Senate’s version of the budget. That reduction came partly from the granting of a new exemption to local and state lobbying.