House Republicans Unveil $189-Billion Tax-Cut Package : Congress: Proposal includes $500-per-child credit and a 50% reduction in the capital gains tax rate. Leaders foresee opposition from Senate GOP.

House Republican leaders Thursday unveiled an ambitious package of tax cuts that would particularly benefit retirees, corporations and families with children. The proposal--one of the key elements of the House GOP’s “contract with America”--would cost the government an estimated $189 billion in tax revenue during its first five years and features a tax credit of $500 per child for most families as well as a 50% reduction in the capital gains tax rate.

Republican leaders expect relatively smooth sailing for the package through the House. But they admit that Senate Republicans now seem willing to jettison many of the tax cuts and focus instead on reducing the federal budget deficit.

“I’ve learned after many years of dealing with the Senate on tax issues that if you don’t compromise, you don’t get a bill,” said House Ways and Means Committee Chairman Bill Archer (R-Tex.), who introduced the tax proposal in a speech to a conservative pro-family organization.

Archer’s Senate counterpart, Finance Committee Chairman Bob Packwood (R-Ore.), made it clear this week that he sees tax cuts as a low priority. Other Republican members of his tax-writing panel have also come out against the House plan.

“I know that there are leaders in the Senate who don’t share our commitment to a pro-growth agenda,” said Rep. Robert S. Walker (R-Pa.), a close ally of House Speaker Newt Gingrich (R-Ga.). “But we don’t have a strategy yet to deal with that problem.”

Archer and other House Republican leaders stressed that their tax bill lives up to one of their central campaign promises: to offer steep individual and business tax cuts that, they insist, will generate more rapid economic growth.

“We are keeping our word,” Archer said during his speech, which included a dozen young children by his side to illustrate the tax plan’s impact on families. “Taxes will be cut. Relief is on the way.”

Republicans also vowed that they would comply with another pledge: to compensate for the tax cuts with offsetting spending reductions. The tax and spending cuts will be considered separately by various House committees, but Republican leaders said they hope to package the measures for a vote by the full House later this spring.

That could slow the pace of the tax legislation because the House leadership has given itself until the end of April to craft a package of spending cuts large enough to offset Archer’s tax plan.

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The White House and congressional Democrats--who have proposed their own alternative tax plans focused more directly on the middle class--quickly condemned the GOP measure for significantly increasing the deficit while providing most of its benefits to the rich. Republicans would compensate for the resulting reduction in federal revenue, they said, with spending cuts that would hurt the nation’s children and poor.

“We have one fundamental question to ask of the Republicans: How can they justify providing almost a quarter of a trillion dollars in tax benefits to the most privileged in our society by cutting the most vulnerable in our society--kids and school lunches?” White House Chief of Staff Leon E. Panetta said.

“They are about to give a huge tax cut primarily for the privileged few,” said House Minority Leader Richard A. Gephardt (D-Mo.), who presented his own tax plan in December.

Archer responded by urging the “anti-growth Democrats to stop throwing roadblocks in the path of those who want to try a new way.”

The new tax bill is highlighted by a $500 tax credit for children younger than 18 in families earning less than $200,000 a year.

The credit would cost the Treasury nearly $105 billion over five years, but that is still $13 billion less than the original credit proposed in the House GOP’s contract. The change came because Republican leaders decided that the credit would not be available in full to low-income families with small tax burdens.

Archer has resisted pressure from Democrats as well as other House Republicans to lower the $200,000 income ceiling for the credit. Some Republicans say they believe that the measure would provide unnecessary benefits to wealthy families. The White House has offered a similar tax credit for families earning less than $75,000.

Archer privately opposed the high eligibility level, sources said, but he felt constrained from openly breaking with the original proposal in the GOP campaign contract.

In addition, the plan calls for a new, “back-loaded” individual retirement account. Taxpayers would not get a deduction for $2,000 a year invested in the IRA, as they do now. Instead, they could withdraw their savings tax-free (including interest) for their retirement or for such special purposes as the purchase of a home or educational and medical expenses.

Republicans said their plan would increase family savings at a cost of only $2 billion over the next five years. Critics said the costs would balloon in the future as retirees drew out huge amounts of tax-free savings.

The plan also includes other provisions designed, Republicans said, to reinforce the traditional family structure: a repeal of the so-called “marriage penalty” for two-income couples, an expanded IRA for parents who stay home with their children and new tax breaks for the costs of adoption and the care of elderly parents.

The bill would also repeal the tax increase on the Social Security benefits of affluent retirees, which was a key element of President Clinton’s 1993 economic plan. It would also raise the Social Security earnings limit for people between age 65 and 69 in order to reduce the penalty on senior citizens who want to continue to work.

The element of the plan that has generated the most political heat is one that Republican leaders have pursued for years--a capital gains tax cut.

That $32-billion provision would halve the tax rate on capital gains and index future capital gains for inflation. The capital gains measure in Archer’s legislation, significantly different from the contract’s proposal, would cost the Treasury roughly $22 billion less because of a series of technical modifications, including a provision that would only index capital gains for individuals, not for corporations.

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Those savings allowed Archer to add a $17-billion business provision that was not in the contract--the gradual repeal of the alternative minimum tax for corporations.

All the changes from the original bill brought its cost down by roughly $15 billion over the first five years. Critics argued that hidden long-term costs would explode within a decade. The congressional Joint Tax Committee estimated earlier that the 10-year cost of the tax measures in the contract would be well over $700 billion.

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Cost of the Cuts

The major provisions of the tax-cut bill proposed by House Ways and Means Committee Chairman Bill Archer (R-Tex.), along with the cost through the year 2000. (in billions of dollars)

$500-per-child tax credit: $105

Capital gains tax rate cut and other reductions: $32

Phase-out of corporate alternative minimum tax: $17

Repeal of last year’s Social Security benefits tax increase: $16

Credit to reduce marriage penalty: $8

Small business tax breaks: $8

Estate-and gift-tax cuts: $7

Tax break for long-term care insurance: $6

Tax-free interest on savings for home purchases: $2

Credit for adoption services: $1

Credit for elderly care at home: $1

Offsetting tax increases and other cuts: $14

Total: $189

Source: House Ways and Means Committee