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Tax Plan to Pass House, May Founder in Senate

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  • Full Coverage: The Tax Bill
  • By Eric Pianin
    Washington Post Staff Writer
    Thursday, August 5, 1999; Page A4

    The Republicans' giant compromise tax package appears headed for passage in the House today, but it has run into trouble in the Senate, where moderate Republicans and centrist Democrats are unhappy with its size and tilt toward upper-income Americans.

    Yesterday, moderate Republican Sen. James M. Jeffords (Vt.) and four centrist Democrats who helped pass the Senate's version of the Republican tax cut a week ago, 57 to 43, signaled that they were leaning against or opposing the final compromise reached late Tuesday.

    While Senate leaders insist the measure will pass before Congress leaves this week for an August recess, three other moderates and conservative Sen. John McCain (R-Ariz.) said they were greatly disappointed with the compromise and were unsure how they would vote. "They're setting themselves up to have Al Gore here to break the tie," warned Sen. Bob Kerrey (Neb.), one of the four centrist Democrats who is switching his vote.

    Although the broad outlines of the $792 billion tax plan were announced Tuesday night by House Ways and Means Committee Chairman Bill Archer (R-Tex.) and Senate Finance Committee Chairman William V. Roth Jr. (R-Del.), the fine print began to surface yesterday.

    Those details highlighted the the Republicans' predilection for costly breaks for multinational corporations, real estate ventures and other special interests as well as for broad-based tax relief.

    The GOP plan would cut all income tax rates by one percentage point, phase out the so-called marriage tax penalty, eliminate the estate tax, reduce individuals' capital gains taxes, enhance investments in IRAs and help defray the cost of education, health care and long-term care for the elderly.

    It also devotes nearly a tenth of the $792 billion to favors for corporate America, most notably a provision worth $24 billion over 10 years that would benefit multinational corporations.

    Since the mid-1980s, these companies have attempted to secure changes in the tax code that would allow them to allocate their worldwide interest deductions in such a way as to generate additional foreign tax credits -- and thereby trim their tax bills. The House version of the bill was far more generous to these companies than the Senate plan, and the House prevailed in the final negotiations. The House also insisted on a break for foreign oil and gas income that would cost the Treasury more than $4 billion.

    Among some of the other special targets: repeal of a 10 percent excise tax on certain kinds of fishing tackle boxes; an increase in tax breaks for reforestation expenses incurred by timber companies; breaks for purchasers of nuclear plants aimed at the costs of cleaning up reactor sites; and a credit for electricity produced from poultry waste.

    For Americans living abroad, the bill would exempt their frequent-flier miles from the airline ticket tax. The three-martini lunch made something of a comeback as the conferees agreed to gradually increase the deduction for business meals, from 50 percent to 60 percent of a meal's cost.

    The compromise also would extend the research and development tax credit sought by high-tech businesses by five years, instead of the permanent extension they want.

    The plan represents a melding of often conflicting tax policies and strategies, with the House prevailing in its insistence on a broad-based tax cut and a reduction in the capital gains tax rate and the Senate having its way in beefing up proposals for health care and long-term care tax relief, education and an expansion of individual retirement accounts.

    Roth, an ardent advocate of IRAs, succeeded in increasing the annual contribution limit from $2,000 to $5,000. And being in favor of targeting the income tax relief to middle- and lower-income people rather than granting it across the board, he modulated the tax rate cuts the House sought for higher-income Americans.

    "As far as the political solution on the tax rates, what they've come up with is an almost Solomon-like splitting down the middle," said J.D. Foster, executive director of the Tax Foundation, a conservative research group.

    Archer said yesterday that the compromise plan was "a very good blend of the two bills" and that "I think it would be a mistake for either side to declare victory."

    Roth added, "To me, the one good thing about the package is there is real tax relief for all groups."

    While the Republicans insist their plan provides something for just about everyone, the tax cuts are predicated on a gradual increase in the surplus, and many of them will not be fully phased in until the ninth or 10th year of the overall plan.

    For example, the reduction in the income tax rates will not be fully phased in until 2005, while the repeal of the estate tax would take place in small increments beginning in 2003, with the full impact delayed until 2009. Relief from the "marriage penalty" that hits many two-income couples would phase in between 2001 and 2008. The tax cut for 2000 would total only $5.2 billion.

    President Clinton yesterday called the Republican tax cut "risky and plainly wrong" and pledged in the bluntest language he has used to date to veto any tax cut resembling the GOP's current plan.

    Saying that Republicans were pursuing an economic strategy that was a "proven failure" in the 1980s, Clinton told reporters in a Rose Garden appearance: "If they conclude this plan and send it to me, I will have to veto it. I will refuse to sign any plan that signs away our commitment to America's future -- to Social Security, to Medicare, to paying down the debt."

    But Clinton's confrontational words one minute turned conciliatory the next. He said his opposition to a tax cut is a matter of "basic arithmetic," not politics, and that if he and Republicans could agree on a smaller cut, he'd be happy to sign it.

    He said there is more reason for optimism about the prospects of a deal on tax and spending issues than many people assume, noting that he and the GOP reached agreement on welfare reform in 1996 just before the election. "You asked me, can we achieve this," Clinton said. "Of course, we can."

    House leaders said yesterday they were confident the tax plan would sail through their chamber, while Roth and Senate Majority Whip Don Nickles (R-Okla.) predicted that the plan would pass in the Senate as well. But several moderate Republicans whose votes will be critical say they are unhappy with the final plan and aren't certain how they will vote. They include Sens. John H. Chafee (R.I.), Susan Collins (Maine) and Olympia J. Snowe (Maine).

    Staff writers Helen Dewar and John F. Harris contributed to this report.

    © 1999 The Washington Post Company

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