House GOP Poised for Passage of $189-Billion Tax-Cut Bill : Congress: Stage is set for Republican victory after a tough intraparty battle. The proposal is the final component in the ‘contract with America.’

After a bruising intraparty fight, House Republicans were poised late Wednesday to push through a $189-billion package of tax cuts for families with children, retirees and corporations--the final provision of their “contract with America.”

The package moved toward approval only after House Speaker Newt Gingrich (R-Ga.) and other leaders mollified moderate Republicans who had demanded changes to reduce benefits for the wealthy and to lock in offsetting spending cuts to avoid a new surge in the federal budget deficit.

House Majority Whip Tom DeLay (R-Tex.) said that the victory would be the most difficult of any element of the Republican “contract” and noted that, as early as Wednesday morning, the leadership was at least 21 votes short and faced a politically devastating defeat.

Republican lawmakers were subjected to last-minute arm twisting by Gingrich and other leaders, who emphasized the importance to the party of living up to the “contract” that many House GOP members signed during last year’s election campaign.

“I think people switched as the vote approached and as the seriousness of the impact on the ‘contract’ and on the party of a defeat became clear to Republican members,” DeLay said.

A critical test vote came Wednesday afternoon on a procedural issue, won by the leadership, 228 to 204. Nine Democrats defected to the GOP side, offsetting the loss of 11 Republicans.

The major elements for individuals in the bill: a $500-per-child tax credit for families with incomes up to $200,000, a broad expansion of individual retirement accounts, a rollback of higher taxes on Social Security benefits of affluent retirees, the elimination of the so-called marriage penalty and the lifting of the tax threshold for estate and gift taxes.

For investors and businesses, the measure also would cut the capital-gains tax rate by 50% and then index it for inflation, gradually repeal the alternative minimum tax designed to force corporations to pay some tax no matter how many tax breaks they enjoy and provide sharply higher tax breaks for investments in new machinery as well as accelerated write-offs for small firms.

The triumph would cap the Republican’s self-proclaimed 100-day revolution. The House will have passed 9 of the 10 items in the GOP “contract,” failing only on the issue of term limits.

Many of those measures seem certain to be altered or defeated in the Senate and could face vetoes by President Clinton. In fact, many Senate Republican leaders are openly opposed to the House tax bill and Treasury Secretary Robert E. Rubin and White House Budget Director Alice Rivlin have recommended that Clinton veto it.

But so far, the Senate has defeated only one of the “contract” bills, the balanced-budget amendment, and Clinton has yet to use his veto pen. Instead he has signed two of the “contract’s” provisions into law.

So Wednesday’s final vote was treated as a special accomplishment by the House leadership.

“With this bill, the tax-raising legacy of President Clinton and his party is officially over,” said House Ways and Means Committee Chairman Bill Archer (R-Tex.).

Republican leaders defeated a series of last-minute efforts by Republicans and Democrats to amend the tax bill. And as the final vote approached, they defeated, 313 to 119, a Democratic alternative tax package, sponsored by House Minority Leader Richard A. Gephardt (D-Mo.), that focused more on tax relief for the middle class. It also included a measure that would have prevented wealthy Americans from avoiding taxes by renouncing their citizenship.

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The Republicans moved toward victory only after the leadership agreed to merge the legislation with a spending-reduction bill that pays for the tax cuts. And the House agreed not to put the tax bill into effect until the leadership produces a plan setting out a path to a balanced budget by the year 2002.

Still, Republicans were not completely united on the bill, as some junior members of the party argued that voters want deficit reduction far more than tax relief.

“The truth is we are flat broke,” warned Rep. Scott L. Klug (R-Wis.). “This is a retreat from deficit reduction.”

Democrats charged that the Republican tax bill calls for a massive tax break for the rich, paid for by spending cuts in programs designed to aid the poor and the middle class.

“Speaker Gingrich calls this the crown jewel, but it is a synthetic, virtually worthless stone,” argued Rep. Steny H. Hoyer (D-Md.). “Neither our country nor our children can afford it.”

The Republican leaders instituted a controversial shift in budget rules to finance the tax cut package in part through reductions in a wide array of domestic social programs. Previously, cuts in taxes could only be paid for through cuts in entitlement programs or with increases in other taxes.

Revenue lost because of the tax cuts in Wednesday’s bill would be made up in part by cutting $66 billion from welfare expenditures over five years and by more than $100 billion in additional, but unspecified spending cuts that Democrats charge are likely to include more reductions in poverty programs.

While the package will cost $189 billion over five years, the Administration warns that the costs of the tax cuts will explode after the turn of the century and would reach $630 billion over 10 years.

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The enormous long-range costs of the plan frightened many Republicans and at least 100 pushed to scale back the package’s most costly element, the tax credit for families with children, which the Joint Committee on Taxation estimated would cost about $104 billion over five years. They demanded that it only apply to families with income up to $95,000, rather than $200,000, but most in that group agreed to vote for the bill despite their defeat on that change.

Most of the Republicans who did vote against the bill did so out of opposition to a provision requiring increased pension contributions from federal employees.

GOP leaders decided to offer the bill Wednesday with only one change in the committee-approved version: a requirement that, before the tax cuts become effective, Congress approve a plan to balance the budget by 2002.

On Wednesday, Clinton again stopped short of vowing to veto the bill, but still charged that the measure would cut such programs as Head Start and education “to pay for a tax cut for the wealthiest Americans.”

“That is wrong,” he told the Building Trades Assn.

But Archer and other Republican leaders brushed aside Democratic attacks. “The days of tax and spend are over. The days of smaller government and less taxes are at hand,” Archer said.

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What’s In It for You Here are some of the key provisions and costs during the first five years of the House-passed $189-billion tax-cut measure:

Individuals and Families:

Child tax credit: Taxpaying families with incomes of up to $200,000 would be eligible for a $500-per-child tax credit for children age 17 and under. The credit would be phased out at higher income levels. Cost: $104.9 billion.

Marriage penalty: Married couples whose tax bill exceeds the total they would have paid as individuals would receive a credit of up to $145. Cost: $8.2 billion.

Individual Retirement Accounts: Income restrictions would be eliminated, allowing all workers to invest up to $2,000 a year. In a reversal of the current situation, annual IRA contributions would be taxed, but all funds (representing accrued interest as well as principal) that were withdrawn upon retirement or for certain expenses such as education would be tax-free. Non-working spouses would be allowed to make $2,000 annual contributions to traditional IRAs. Cost: $500 million.

Capital gains: The top rate, currently 28%, would fall to 19.8%; the rate would also fall in lower brackets. Cost: $31.7 billion when combined with other capital gains changes.

Adoption reduction: Families earning less than $60,000 who adopt a child would receive a $5,000 tax credit to help defray expenses. The credit would be phased out at higher income levels and eliminated for incomes above $100,000. Cost: $1 billion.

Estate and gift taxes: The amount potentially excluded from estate and gift taxes would increase by $100,000. Cost: $1 billion.

Business

Corporate capital gains: The top rate of 35% would fall to 25%, and brackets would be indexed to inflation. Cost: $31.7 billion when combined with other capital gains changes.

Depreciation: Tax write-offs for investment for plants and equipment would be expanded to reflect inflation. Revenue gain: $16.7 billion (but an $88 billion cost over 10 years).

Small business: Firms would be given a larger deduction for investments in plant and equipment in the year the purchases were made. Cost: $7.8 billion.

Alternative minimum tax: This tax, which ensures that corporations pay at least some tax, would be repealed. Cost: $16.9 billion.

Home office: Taxpayers with no other place of business, who use their home office for administrative work, would be allowed a deduction. Cost: Not available.

Source: House Ways and Means Committee, Congressional Quarterly.