Panel OKs Tax Cuts, Seeks Levy on Tobacco

WASHINGTON — The Senate Finance Committee approved legislation Thursday night that would provide $85 billion in net tax cuts over the next five years, at the same time raising cigarette taxes by 20 cents a pack and imposing an $8-a-trip fee on international airline flights from the United States.

Agreement came on a bipartisan 18-2 vote after senators spent most of the day behind closed doors wrangling over a proposed 10% tax on the domestic portions of international airline flights, a provision committee leaders had inserted to help stem the revenue losses for the Treasury.

The panel ended up paring back the original airline levy and adding the $8-a-trip user fee on all international flights. To make up for the smaller revenues from the airline levy, it also voted for the 20-cent increase on the federal tax on cigarettes. The current federal tax on cigarettes is 24 cents per pack.

The Finance Committee measure is closer to President Clinton’s tax-reduction proposal than a similar bill voted last week by the House Ways and Means Committee. Both versions are expected to come up for floor action in their respective houses next week.

The tax package, which constitutes the largest such tax cut since 1981, is a key component of the overall plan Clinton and Republican congressional leaders agreed to last month for balancing the budget by 2002.

The Finance Committee bill contains these major provisions:

* A tax credit for families of up to $500 for each child under 17, aimed primarily at couples whose combined income is less than $100,000 a year. For children between 13 and 16, the credit would go only for funds that are placed in a special education savings account.

* An education tax credit of up to 50% of $3,000 spent on tuition and books for the first two years of college or up to 75% of $2,000 spent for community colleges. Interest on student loans would be deductible. Money in individual retirement accounts could be used for college costs.

* A cut in capital gains taxes, reducing the top rate to 20% from 28% now, except for profits from real-estate sales, which would be taxed at a maximum 26%. The bill also would provide special reductions in capital gains taxes for small businesses and venture capital.

* A reduction in inheritance taxes by increasing the exemption from federal estate taxes to $1 million by 2008--up from $600,000 now--and providing an additional $1-million exemption immediately for many family-owned farms and businesses.

* Liberalization of restrictions on individual retirement accounts by increasing the income limits and creating new kinds of accounts--open to all taxpayers, no matter what their income. The interest a depositor earns could be withdrawn tax-free to buy a first home or to retire.

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Although the measure is similar to the version drafted by the House Ways and Means Committee, it differs in important respects, particularly on the key issue of capital gains tax rates, which have been a major bone of contention between Democrats and Republicans.

Unlike the House bill, for example, the Finance Committee measure would not allow taxpayers to adjust their capital gains for inflation--a step that effectively would reduce the tax bite on such profits substantially. And it would not cut capital gains taxes for corporations.

Clinton warned in an interview with the Wall Street Journal on Thursday that he would not sign a tax bill that allowed taxpayers to adjust their capital gains for inflation, arguing that it would deprive the Treasury of too much revenue.

Clinton initially had proposed a $1,500 tax credit for college students, an alternative deduction for tuition or job training, penalty-free withdrawal from IRAs for college costs or for purchase of a first home and a $500,000 exclusion for couples on capital gains from the sale of a residence.

Despite some bickering over individual provisions, the finance panel appeared to sustain the bipartisan spirit that characterized its action in approving a sweeping new Medicare bill on Wednesday. By contrast, the House version of the bill drew no Democratic support.

Nevertheless, Democrats echoed Clinton administration concerns that the measure--as well as the bill’s House version--may be too skewed toward benefiting upper-income taxpayers while not providing enough relief for lower-income workers.

But Sen. Phil Gramm (R-Texas) argued Thursday that if the measure appeared to be skewed, it was only because the bulk of the tax relief was going to those who pay the most in taxes. “This is a tax cut for taxpayers,” he told the panel.

Some Democrats also fretted that the loss of revenue resulting from the tax cuts beyond 2002 may prove unacceptably high.

The congressional Joint Committee on Taxation, which provides the revenue estimates for both houses, has calculated that the tax package would deprive the government of some $165 billion in revenues between 2002 and 2007--almost double the total for the first five years.

The dispute over the 10% airline tax provided an unexpected glitch for the panel. Chairman William V. Roth Jr. (R-Del.) had hoped to complete action on the bill early Thursday, but heavy lobbying by the airlines left senators uneasy about the provision.

Airline officials had argued that the provision would hurt business, particularly on international flights from heartland cities such as Chicago, so the committee revised this element of the bill to lessen the tax. Also, the $8-per-ticket fee that the committee added would spread the impact among all international travelers.

The panel’s actions Thursday would raise several billion dollars more than the original version of the airline tax would have taken in, leaving room for more-generous tax breaks in two areas--eligibility for the $500-a-child tax credit and a cut in capital gains taxes on commercial buildings.

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As a result of the increased revenues, the panel decided to allow low-income taxpayers who receive the long-standing earned-income tax credit for the working poor to claim up to half of the newly created $500-a-child credit. The previous bill would have deprived them of that benefit.

The panel also voted to reduce the top rate on capital gains from the sale of commercial buildings to 24%, rather than the 26% it had planned before. The maximum rate currently is 28%. Capital gains are the profits from the sale of assets or stocks.

At the same time, however, the committee voted to reduce the size of the new health insurance program that it approved Wednesday for uninsured children to $24 billion over the next five years instead of $25 billion, as it had indicated earlier. The increase in the cigarette tax was not sufficient to maintain the full $25-billion program.

The move drew a stiff rebuke from Sen. Edward M. Kennedy (D-Mass.), who last month lost a Senate vote to raise cigarette taxes by 43 cents a pack. Kennedy called it “unconscionable” to use the increased revenues from the higher tobacco tax to help hold down the levy on airline fares.