GOP Tax Cuts Target Children, Corporations

Launching their drive for the first major tax cut since 1981, House Republicans on Monday announced how they plan to reduce taxes by $85 billion over the next five years for a broad swath of Americans, including families with children, people who are selling their homes, corporations and the heirs of large family estates.

In a sign that the coming tax-cut debate may reignite the rhetoric of class warfare between the parties, Democrats immediately responded that the GOP bill veers too sharply in the direction of the most affluent taxpayers.

The GOP proposal provides the first detailed look at the likely winners and losers under the tax package endorsed in broad outline by President Clinton and GOP leaders in this spring’s budget agreement. Among the potential losers--the targets of about $47 billion in tax increases that would partly offset $132 billion in cuts--are ethanol producers and Indian casinos.

“The tax-relief package we will consider represents a solid first step toward a smaller government for bureaucrats in Washington and a larger paycheck for workers in the heartland,” said Ways and Means Committee Chairman Bill Archer (R-Texas), architect of the proposal that will be considered by his tax-writing committee later this week.

Although the bill generally tracks the broad outlines of the budget agreement, Democrats charged that the GOP filled in the details in ways that would systematically benefit the affluent. Treasury Secretary Robert E. Rubin said that he has “serious concerns” about Archer’s proposal because it “seems to have moved the tax benefit away from the less well off and even away from middle-income people toward higher-income people.”

In particular, administration officials and Rep. Charles B. Rangel of New York, the top Democrat on the Ways and Means Committee, criticized a feature of the proposed tax credit for families with children that would reduce benefits for the working poor. They also opposed provisions of Archer’s education tax breaks that critics said would penalize people who go to lower-cost colleges, as many students with modest incomes do.

The budget agreement specified that tax cuts should include family tax credits, estate and capital gains tax cuts, expansion of individual retirement accounts and beefed-up education tax breaks. It left it to Congress to fill in the details and squeeze all those pieces into an $85-billion net tax cut.

The single largest element of Archer’s proposal is a $500-per-child tax credit for families, which would cost the government $71 billion over the next five years. The full credit, which applies to children under 17, would be available to families with incomes up to $110,000 or single taxpayers with incomes up to $75,000.

But Democrats complained that the credit’s value would be reduced for taxpayers who receive the earned income tax credit (a break for the working poor) or who claim the federal deduction for child-care expenses.

Archer’s bill calls for cuts in the tax on capital gains--profits from the sale of stocks and other assets. Fulfilling a long-held Republican goal, Archer would cut the top rate from 28% to 20%. If families making up to $41,200 or individuals earning up to $24,650 had a capital gain, they would pay only 10%, compared to their income tax bracket of 15%.

A more controversial proposal would exempt inflation-driven increases in the value of assets from the capital gains tax beginning in 2001. The Clinton administration and other critics have opposed that so-called “indexing” proposal for fear that its costs would spiral out of control.

Proposing a special break for homeowners like one pushed by Clinton, Archer would allow couples to exclude from capital gains taxes up to $500,000 of profits from the sale of a home. Single taxpayers could exclude as much as $250,000.

For education, Archer proposed a package of tax breaks worth about $31 billion. That is less than the $35 billion Clinton had demanded during budget talks with GOP leaders, and Archer’s plan differs in many other respects from the president’s.

Like Clinton, Archer proposed tax credits for college expenses of up to $1,500 a year, but Archer wants to limit the credit to 50% of actual costs. Democratic critics said that would limit the credit’s benefit for students at community colleges and other low-cost institutions.

“It will tend to disadvantage the less well-off in our society,” Rubin said. “And as you look through this program, in component after component, that is what this program seems to have done.”

Archer also included an array of other education-related tax breaks, including penalty-free withdrawals from individual retirement accounts for college expenses and new tax-free savings accounts for future college costs. He also wants to allow IRA withdrawals for the purchase of a first home.

The Ways and Means chairman also proposed reducing the estate tax, which now applies to inheritances in excess of $600,000, by raising that figure to $1 million by 2014.

Archer also included significant tax relief for corporations. He would cut corporate capital gains taxes gradually from 35% now to 30% by 2000. And, in an important break that was not part of the budget agreement, he proposed eliminating a special tax known as the alternative minimum tax, which was designed to ensure that no profit-making enterprises escaped federal taxation entirely.

Some of Archer’s proposed $47 billion in offsetting tax increases already face powerful opposition. Senate Majority Leader Trent Lott (R-Miss.) has already come out against a proposal, embraced by Archer, to tax the profits of Indian-owned casinos and other commercial activities. Likewise, House Speaker Newt Gingrich (R-Ga.) opposes Archer’s plan to reduce subsidies to ethanol producers, a tax break critics call a form of corporate welfare.

Times staff writer Jonathan Peterson contributed to this story.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Tax Cut Targets

The major elements of the tax-cut proposal unveiled Monday by House Ways and Means Committee Chairman Bill Archer (R-Texas):

Family taxes. Provides tax credits of $500 for each child under 17, available in full to families earning less than $110,000.

Capital gains. Drops the top tax rate from 28% to 20%. Beginning in 2001, capital gains would be discounted for inflation in calculating the tax due.

Education. Provides tax credits of up to $1,500 for college expenses, but no more than 50% of costs and only for couples earning less than $80,000 and individuals earning less than $40,000 annually. Allows tax deductions of up to $10,000 for payments through state prepaid tuition programs.

Home sales. Exempts up to $500,000 in profits from a home sale from capital gains taxation for couples, up to $250,000 for individuals.

Estates: Reduces estate taxes by gradually increasing the size of estates that are exempt from taxation from $600,000 now to $1 million in 2014.

Retirement. Allows new Individual Retirement Accounts in which deposits would not be deductible but earnings would be tax free as they are accrued and as they are withdrawn.

Corporations. Phases out the corporate alternative minimum tax, which was designed to make sure that no company eliminated all its tax liability through deductions and credits.

Source: Times Washington Bureau