Bush Proposal May Signal Return of Tax Loopholes : Economy: The White House, many Democrats want to drop 1986 reforms on deductions, exemptions, credits.

By JAMES RISEN

Jan. 28, 1992 12 AM PT

TIMES STAFF WRITER

WASHINGTON — The economic growth plan that President Bush is expected to unveil in his State of the Union message tonight could signal the return of the tax break--and the waning of Washington’s resolve to level the playing field for all citizens when it comes to taxation.

In fact, the President’s tax and budget plan, originally designed by the White House to cure the recession and promote future economic growth, appears likely to accelerate a fundamental shift in the way Washington thinks about taxes.

Six years ago, in an unlikely and historic experiment, the White House and Congress eliminated many of the deductions, exemptions and credits that gave some taxpayers advantages over others and distorted investment and spending decisions.

In return, Washington cut income tax rates to provide new incentives to all Americans to work and invest. Now, under the banner of economic stimulus and recession relief, the White House and many Democrats in Congress want to roll back the clock on the 1986 tax law changes.

Bush’s economic recovery and growth plan is full of changes in that law: lower taxes on capital gains, accelerated depreciation for industry, “passive loss” deductions for developers.

And reform advocates say they fear the economic policy debate that begins tonight may set off a mad scramble among Washington lobbyists to piggy-back their own tax proposals on the President’s package.

One such proposal--eliminating the luxury tax on yachts--already has been adopted by the Administration. Others that are likely to surface are restoring the investment tax credit for businesses and restoring special breaks for the oil industry.

The focus of the action will be “Gucci Gulch”--the nickname for the hallways outside the hearing rooms of the tax-writing committees of Congress, where immaculately dressed tax lawyers and trade association representatives await word on their favorite tax proposals.

“When the President gives his speech, it will be like, ‘Gentleman, start your engines,” observed Joseph Dowley, a tax lobbyist with a Washington law firm and a former senior congressional staff member.

If many of these proposals become law, 1992 may be remembered as the year of the loophole.

“This (the President’s growth plan) is the window of opportunity for everyone who has been waiting with something they want in the tax area,” observed Lori Gribbon, a senior lobbyist for the imported car industry. “I think it is going to be a major battle . . . and there is a chance that the ’86 bill will get dismantled.”

“There is a good chance that Congress will undo . . . the 1986 tax reform,” said Wendell Primus, chief economist for the House Ways and Means Committee. The tax battle, he added, will “be very much a political setting this year.”

Ever since the White House started to work on a tax cut plan last fall to fight the recession, lobbyists have been pushing their pet ideas in meetings with senior Administration officials. “You try to get to the right people in the Administration while they are working on things, to get your message heard,” one lobbyist said.

The Administration clearly has been listening. Just last week, Treasury Secretary Nicholas F. Brady met privately in his office for a last-minute strategy session with a coalition of lobbyists pushing for a cut in the capital gains tax rate.

At least some lobbying seems to have paid off: The Administration has apparently agreed at the last minute to include in its economic package a controversial proposal to repeal the luxury surtax on yachts and possibly other frills for the wealthy.

The President and congressional leaders insist they want to avoid a bidding war over taxes that could lead to restoration of many of the tax breaks ended in 1986. “I think everyone knows that I would rather do nothing” than to encourage such a bidding war, said Sen. Pete V. Domenici (R-N.M.), ranking minority member of the Senate Budget Committee.

Faced with a mountain of federal debt that restricts government policy as never before, both sides hope to retain control over the tax battle this year.

Still, both Republican and Democratic leaders admit they fear quickly losing control over the tax-writing process, especially after Bush sends his proposals to Congress and tax lobbyists--many of whom are campaign contributors--shift their focus to election-minded legislators.

“I think the danger of a bidding war is very real,” said Rep. Leon E. Panetta, (D-Carmel Valley), chairman of the House Budget Committee.

“The question is,” Panetta said, “can we hold together a tight and targeted tax package that is paid for (under the 1990 deficit-reduction agreement)? And if not, is the leadership willing to drop the whole idea? I don’t know, I think we’re rolling dice.”

Besides expanded income tax exemptions for middle-class families and a reduction in the tax on capital gains, which would benefit many affluent Americans, the White House plan would include tax breaks designed to appeal to specific constituencies.

For example, the proposed “passive loss” provisions, accelerated depreciation schedules and tax credits for first-time home buyers are strongly supported by the home-building industry, which hopes for expanded construction and sales. Similarly, a proposed expansion of individual retirement accounts is backed by the mutual fund and securities industries, which stand to gain as more Americans invest for the future.

While Administration officials and many lawmakers said these proposals would encourage productive new investment, critics charge that the White House package represents an abandonment of the 1986 tax revisions.

Those revisions, achieved after the White House and Congress struggled for months to simplify the confusing maze of deductions, exemptions, credits and other breaks that have characterized the American tax policy, preserved many of the most popular loopholes, such as the deductibility of mortgage interest payments.