Tax Panel Votes Major Overhaul : Senate Bill Seen as Most Sweeping Since WWII; Reagan OK Hinted

By MICHAEL WINES

May 7, 1986 12 AM PT

Times Staff Writer

WASHINGTON — A weary Senate Finance Committee broke a deadlock between its chairman and oil-state legislators early today and approved, 20-0, what some officials said may prove to be the most sweeping tax-overhaul bill since the Second World War.

The legislation, which now goes to the Senate floor for a probable June vote, would reduce personal tax rates to the lowest level in a half century and reduce corporate taxes from their present 46% rate to 33%.

It also would wipe out all but a handful of the most criticized tax shelters for the wealthy and shift roughly $50 billion of revenues from those defunct shelters to lower taxes for poor and middle-income individuals.

Ranked With Landmark Bills

Deputy Treasury Secretary Richard Darman called the bill “one of the two or three most significant tax bills of the century,” and other officials ranked it with 1940s measures that set top tax rates of more than 90% and introduced paycheck withholding of taxes.

Finance Committee Chairman Bob Packwood (R-Ore.) predicted that the bill would pass the Senate by an “overwhelming” margin with few major changes.

His Democratic soulmate in the crusade for the bill, Sen. Bill Bradley (D-N.J.), agreed. “I think we’re going to get it,” he said, smiling slightly.

Two weeks ago, experts almost unanimously declared Packwood’s tax-revision efforts moribund. But the legislation approved Wednesday not only won complete approval from a contentious committee but apparently exceeded the criteria laid down by President Reagan for his own political support.

Has Some Questions

Reagan, speaking in a Tokyo press conference late Tuesday, said it is “very likely that I could find myself supporting the Senate Committee’s version” of the bill.

Despite some questions about the bill, he said, it “basically” meets his desires for a major cut in tax rates, an increase from $1,080 to $2,000 in the personal exemption and new incentives for capital formation in business.

That endorsement had been viewed here as vital to approval of the tax bill. What sealed the approval, after a day in which Packwood and Bradley battled repeated efforts to alter the bill, was a compromise with oil-state senators that opened the only significant “loophole” in the measure.

As part of a $14.6-billion package of technical amendments, the panel voted to allot $1.4 billion to preserve tax shelters now enjoyed by some oil-and-gas drillers and their investing partners.

That captured the backing of Louisiana Democrat Russell B. Long and other oil-state panel members, including Senate Majority Leader Bob Dole (R-Kan.), Lloyd Bentsen (D-Tex.) and David L. Boren (D-Okla.).

Only Major Loss

The oil-and-gas vote was the only major loss Packwood suffered during the day and it dismayed the tax bill’s supporters. “What we’re doing here is establishing one rule for every American interest, every American business except oil and gas,” said Sen. George J. Mitchell (D-Me.). “I can see no justification for that. No rational basis has been offered.

But Dole depicted the change as an effort to help a fiscally devastated band of small-time oil drillers whose well’s produced “two or three barrels a day.”

To make up for the revenue lost in that change and other bits and pieces in the $14.6-billion package, the Senate committee approved a long list of money-raiseing provisions, led by a repeal of the investment tax credit retroactive to Jan. 1, 1986, instead of Jan. 1, 1987, as had been proposed.

Reaching that deal took five hours in which cases of iced champagne sat unopened in a Senate back office. To seal the pact, Long was summoned from a New York meeting to attend a closed-door bargaining session.

Had to Make Compromise

“Packwood needs Long for the bill, and he knows that to get Long he has to make a compromise,” one lobbyist said.

Before the oil dispute, the finance panel had followed Packwood’s urgings in a day-long series of votes, ignoring pleas to ease the bill’s impact on a legion of constituents.

Packwood himself supported the only other major change in the bill approved Wednesday, affecting tax-sheltered savings retirement plans used by more than 30 million workers.

The committee voted to shift $1.6 billion in tax benefits from 401(k) programs, to the more popular individual retirement accounts, but later voted to raise money elsewhere to restore the 401(k) plan losses.

Those changes kept the bill’s maximum tax-free contribution to 401(k)s at $7,000, still down sharply from the currently allowed $30,000 a year.

But the savings were then used to salvage IRAs, which the committee had earmarked for drastic cutbacks.

The panel had planned to restrict IRA contributions only to workers and their spouses not covered by another pension plan, scrapping current law which allows virtually all working adults to contribute up to $2,000 tax-free dollars to an IRA account.

Move Bitterly Opposed

Under a compromise proposed by Sen. John H. Chafee (R-R.I.), workers covered by other retirement plans will be allowed to shelter from taxation only the interests and dividends that their contributions generate.

The move was bitterly opposed by Sen. John Heinz (R-Pa.) and a handful of other committee members, who argued that 11 million workers earning less than $25,000 participate in 401(k) plans and would be hurt by cuts on the program’s standards.

As approved, the tax legislation would deliver a 6.2% average cut in personal taxes, boil the maze of personal tax brackets down from a maximum of 50% to two of 15% and 27% and curb many popular tax shelters and deductions.

The proposal lowers the corporate tax rate from 46% to 33%, but imposes a minimum tax and abolishes investment tax credits.

According to Finance Committee figures, the legislation would remove 6 million low-income Americans from the tax rolls altogether, ensuring that a family of four earning less than $13,500 will pay no federal income taxes.

Most Would Pay Less

Four of five Americans would pay no more than 15% of their taxable income in taxes. The second, higher rate of 27% would apply only to that portion of a joint return’s taxable income that exceeded $29,300 and to taxable income on an individual return exceeding $17,600.

Taxpayers would lose some deductions, including the writeoff for state and local sales tax and for miscellaneous items such as dues and professional publications. But the new rates would be simplified so that only about 30% of Americans would make money by itemizing expenses, compared to about 40% today.

Packwood’s victory on the retirement plan changes was typical of his day. The course was set in Tuesday’s first vote, when Sen. Daniel Patrick Moynihan (D-N.Y.), sought to raise the 33% corporate tax rate to finance the restoration of a popular deduction for state and local sales taxes.

Packwood appealed to hold the line. “We have now got going for us a bill that the public...is going to like,” he said. “And for us to start going up on the 33% or the 27% rate is going to serve us ill.”

The panel agreed and rejected the proposal and a later similar one by surprising 7-13 margins.

Said Bill Was Fragile

Again and again, Packwood and his allies warned legislators that their bill’s fragile unity would unravel if the key personal and corporate tax rates were hiked to finance tax breaks for others.

“I think the important thing is to get this bill,” Bradley , a strong supporter of the bill, said during one critical vote. “And I’m willing to vote against this amendment to get it.”

But some of the battles were pitched. An effort to preserve the current 100% deductibility of business meals and entertainment lost on a tie vote, as did an attempt to change depreciation rules benefiting some real-estate investors. Each would have boosted the 33% corporate rate to raise money for the breaks.

The loudest cry was raised against a Heinz proposal to let businesses apply 70% of their investment tax credits against the bill’s proposed 20% minimum corporate tax.

Heinz cast the plan as a boon to farmers who otherwise would be socked with a 20% tax “even though, by any rational standards, they are not making any substantial amount of money.”

Pointed Out Big Profits

But the rationale vanished when Sen. David Pryor (D-Ark.) noted that the clause allowed hugely profitable firms, including Pentagon contractors charged with price-gouging, to pay as little as 3% tax on their profits.

Pryor accused lobbyists of duping small farmers into pelting Congress with postcards supporting Heinz’s plan.

“They’re using the poor to do the work of the rich,” he said of the lobbyists. “They dont talk about the $150 million, or the $600 million one company is going to get back” under the proposal.

The amendment lost by a 7-to-13 vote.”We’ll take it a vote at a time,” an obviously pleased Packwood said later.