Democrats Offer Another Tax Plan : House Closer to Accord With Senate on Radical Changes

WASHINGTON —  House Democrats Friday edged visibly closer to an agreement with the Senate on radical changes in the tax laws.

Their new blueprint for tax overhaul would keep sales tax deductions, abolish deductions for consumer interest and preserve individual retirement accounts for lower-and middle-income groups but not for upper-income taxpayers.

The plan, which would reduce taxes on individuals by $142 billion and increase corporate taxes by a similar amount over the next five years, was greeted coolly by Senate Republicans, who earlier this week offered a more modest plan that would shift $115 billion of the tax burden from individuals to business.

‘A Quantum Leap’

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), ending two days of late-night meetings with fellow Democrats, called the blueprint “a quantum leap toward a final agreement” on tax revision.

The senior House Republican tax negotiator, John J. Duncan of Tennessee, said that parts of the proposal were unacceptable to his colleagues but withheld judgment until Monday.

The Democrats appeared to make long strides toward easing one of the most politically sensitive issues of the tax talks by offering a plan that would save popular IRAs for many families earning less than $50,000.

Their complex proposal would allow individuals earning less than $25,000 in adjusted income and couples making less than $40,000 to deduct contributions of up to $2,000 a year to IRAs, as they may under current law.

Other Restrictions

Taxpayers earning more than those levels also could continue their tax-free $2,000 IRA contributions if they are not covered by company pension plans.

But for those with pension plans at work, IRAs would be limited or abolished. For singles making between $25,000 and $35,000 and couples earning between $40,000 and $50,000, the IRA contribution would be phased out.

Taxpayers above those levels could no longer make IRA contributions at all--unless they are not covered by company pension plans. For them, earnings from already-established IRAs would continue to be tax free. But they could not add to those previously established accounts.

Under the original Senate-passed bill, all taxpayers with company pension plans would lose the deduction for their IRA contributions, although earnings on new IRA contributions would continue to be tax-deferred. Taxpayers without company pension plans could continue to make tax-deductible contributions to their IRAs.

Rostenkowski’s blueprint would offer expanded tax relief largely to households earning less than $75,000 and make up the lost revenue by hiking business taxes in areas certain to cause pain for Senate Republicans.

That $115-billion versus $142-billion corporate tax gap, much of which stems from stricter House rules on the write-off of aging property, factories and equipment, may be the biggest sticking point in the bargaining that remains.

‘Damaging to Jobs’

After being briefed on the plan, Sen. John H. Chafee (R-R.I.), a member of the Senate negotiating team, said it “would be absolutely rejected” in its current form by his colleagues. “It does all the things we think are extremely damaging to jobs in this country,” he said.

However, the plan presented on Friday makes it clear that the Senate negotiators also have won lasting concessions from the House on key changes in the personal income-tax code that once promised to be almost as divisive. --The House accepted the Senate’s plan to abolish the deduction for consumer interest, a popular tax break that largely aided upper-income households and will raise $26.2 billion over the next five years.

--The House also bowed to the Senate and wiped out deductions for charitable contributions by taxpayers who do not itemize. The House had proposed to allow deductions for the total of gifts exceeding $100. Those who itemize would be allowed to continue claiming the deduction.

Miscellaneous Deductions

--It also accepted the Senate’s recent proposal to allow miscellaneous deductions, such as individual business expenses, only to the extent that they exceed 2% of a taxpayer’s adjusted gross income. The House also agreed to eliminate deductions for such expenses as tax preparation fees and investment expenses.

Even as they agreed to do away with some popular itemized deductions, the House Democrats pressed to make it more difficult for taxpayers to reach the threshold for claiming other deductions. A single taxpayer would have to accumulate $350 more than the standard deduction before being permitted to itemize under the draft plan, while married couples would have to have $700 more. The standard deduction would be $3,000 for single returns and $5,000 for couples.

The effect of those and other proposals would be to improve tax relief for most households in 1987, and to funnel the greatest benefits to the middle and lower classes. For example, the House Democrats said, under their plan those earning between $20,000 and $30,000 annually would win an average tax cut of 10% in 1987, compared with 5.5% under the bill passed by the Senate last June. Those earning between $40,000 and $50,000 would save an average of 10.7%, compared to only 1.9%, they said.

Corporate Tax Breaks

If the Senate tax negotiators wish to keep those gains for individual taxpayers, Rostenkowski said Friday, it must consider surrendering still more of the corporate tax breaks that it had included in its original tax-revision bill, and which the House now wants to erase.

The only alternative, he said, is for the Senate to abandon its biggest selling point on tax revision--the low personal rates of 15% and 27% (although some high-income taxpayers would be taxed at 32% on part of their income) and the 33% corporate rate scheduled to go into effect in 1988. But the Senate, which battled early to make those rates the starting point for the tax talks, is considered unlikely to be the first to suggest that they be raised.

The latest House blueprint targets a list of some of the Senate’s most cherished business deductions for abolition, an effort to force the Republicans to concede on other issues. Among them are lucrative tax preferences for oil and gas exploration, timber and mining, as well as accounting rules that allow defense contractors and the construction industry to avoid taxes on income that they receive under long-term contracts.

Moreover, the House still wants to reduce write-offs for business investment by $17 billion more than does the Senate, which only grudgingly agreed to consider limited curbs on those write-offs this week.

Rostenkowski said the House blueprint will be “perfected” in meetings Monday and then given to the senators, who are believed likely to make their own counteroffer next week. The negotiators hope to agree on a final tax bill by the congressional recess date of Aug. 15.