As the Senate Finance Committee finished work on a $21 billion tax increase bill in the early hours of July 2nd, the committee room was filled with lobbyists, elbow to elbow--many of whom had been there throughout the 17-hour marathon.

The issue that kept them there until the end was corporate tax leasing. Hardly more than a footnote to President Reagan's tax bill when it passed last year, the tax leasing provisions set off a spree of buying and selling of tax breaks by corporations, and in the process created a firestorm of controversy and public complaint. Thanks to the expanded leasing provisions, some highly profitable companies paid no federal taxes for 1981, and one--General Electric Co.--even collected a $100 million refund for past year's taxes.

Corporate tax leasing had become a symbol of the tax loophole taken to the extreme. Tax reform groups, and such diverse organizations as the United States Student Association and a wide range of environmental organizations, opposed it. Even Treasury officials, who had endorsed leasing, acknowledged that the practice could significantly undermine public confidence in the tax system and encourage broader tax evasion.

Before the Finance Committee adjourned July 2nd, it passed a compromise measure restricting the leasing provisions for now and ending them outright on Sept. 30, 1985 unless Congress decides otherwise. Whatever the final outcome, it is clear that the leasing provisions have played a central role in the overall debate over federal taxes and have set in motion political currents with even broader potential consequences.

There has been a revival of public pressure for what politicians call "fairness and equity" in the tax system. There is no consensus of what this means, but it has increased the drive for significant modification of the marginal rate system, and revived the effort to eliminate special breaks in the tax code.

The leasing provisions and other key features of the Reagan administration's tax cut sharply increased the disparity of tax rates among different industries. A number of economists, in and out of the administration, argue that these disparities will enourage unproductive investment at a time when the need to improve the nation's productivity is considered a key goal.

The debate has raised the question, should the tax system encourage transactions that have little or no economic substance? Although huge amounts of money are involved, $29 billion over six years, corporate tax sales are just that: transactions in which tax-paying firms are buying tax breaks from companies that pay little or no tax.

In a parallel development, there has been a major decline in the power of the corporate lobbying community. Their argument that a major lowering, or elimination, of businesss taxation is essential to economic growth has been severely damaged by the increased attention on special tax breaks ("incentives" to the beneficiaries) that have allowed some corporations to eliminate altogether federal tax liabilities. Tax leasing inadvertently created powerful pressures for new taxes on corporations and deep divisions within the business lobby.

The issues raised by corporate tax leasing are not black and white. A basic justification for tax leasing is that it would prevent many tax-motivated mergers by permitting money-losing companies with large tax losses to swap them for cash to well-off companies that could use the tax credits and deductions to lower their taxes. Otherwise, the money-losing companies would be takeover targets for the prosperous ones, it was argued.

But these arguments were drowned out by the reaction to the leasing provisions. Treasury, still defending corporate tax leasing, moved this year to propose other taxes on business--a corporate mimimum tax, aimed at companies that would otherwise pay nothing and designed to raise $11.6 billion over three years--and restrictions on tax breaks aiding business.

These taxes, particularly the corporate minimum tax, represented a complete reversal for an administration which, in 1981, had proudly proclaimed its corporate tax reduction scheme as an essential investment incentive and the core of economic recovery.

From all appearances, the administration had stopped giving full attention to its supply side theorists, and had begun translating public opinion poll data into its tax policy. "If you ask the average person whether a corporation should pay taxes, the answer is yes, regardless of what they do legitimately to reduce taxes," Treasury Secretary Donald T. Regan would say later.

On the congressional side, Sen. Robert Dole (R-Kan.), chairman of the Finance Committee, who had helped carry the leasing provisions in the 1981 tax bill, reversed himself entirely. Last Feb. 19, he declared his intention to seek repeal or severe restriction of corporate tax sales effective retroactively to that day. His announcement brought the leasing business to a near halt.

Faced with the strong prospect that the leasing provisions would be repealed, the business lobbying community began to mobilize at the start of this year.

Charls E. Walker, whose clients include many members of the airlines, steel and mining firms that benefit from tax leasing, began to coordinate a campaign to preserve the law. (Ironically, Walker's leading role in enacting the leasing provisions last year led to his being fired by a coalition of companies opposed to the corporate minimum tax; they saw the leasing provisions backfire on them, igniting the demands for a stronger minimum tax.)

Working separately, John K. Meagher, former minority counsel on the House Ways and Means Committee and now vice president for government relations for the LTV Corp., put together a coalition of very similar interests.

Ernest S. Christian, Jr., former tax legislative counsel for the Treasury and now a partner in the firm of Patton, Boggs and Blow, whose clients include the Chrysler Corp., entered the fray. Christian had helped write the leasing provision in 1981, nursing it through the complex legislative process, and later had handled legal work on tax sale transactions involving equipment worth $1 billion or more.

In political terms, the power of the industries seeking to protect corporate tax leasing is immense. From the manufacturers of farm implements to the airline-dependent tourism industry, these interests are major employers in every state and in nearly every congressional district. In tax battles, capital intensive firms customarily won, protecting the major corporate tax advantages, including the investment tax credit and highly accelerated depreciation schedules.

By this time GE had switched sides. After first taking maximum advantage of the new leasing provisions, GE urged their repeal, acknowledging that this would likely increase profits for its important equipment leasing subsidiary--while hurting many of the other firms who were able to use the broader leasing provisions enacted last year. In Congress, GE became known as "Greed Electric."

The battle was between old line leasing firms, including GE, that had profited from pre-1981 law, and a wide range of capital-intensive industries, some beleagured, all paying little or no federal tax, including automobiles, airlines, steel, mining, and railroads, that wanted to continue selling unusable tax breaks.

In normal circumstance, it would have been no contest: the political muscle of U.S. capital-intensive industries would have crushed the opponents of tax leasing. There were, however, a number of unusual circumstances benefiting the opponents.

The Joint Committee on Taxation issued a detailed analysis which challenged many of the economic justifications for tax leasing. The study found thatinstead of making competition more equal, tax leasing "tilted" the playing field in favor of companies that do not pay taxes. In addition, the study showed that a quarter of the tax breaks were going to middlemen and profitable firms. A tax benefit designed to help poor firms was resulting in nearly 25 cents out of every dollar going to interests that were not intended to be major beneficiaries.

But on the other side, leasing supporters had significant backing.

Sen. David Durenberger (R-Minn.), who has strong ties to his state's railroad industry and Republic Airlines, headquartered in his state, took on the fight to preserve leasing--with some reforms. Sen. Spark M. Matsunaga (D-Hawaii) became convinced that killing tax leasing would hurt the airline industry, which in turn could damage tourism in his state.

Sen. Russell B. Long (D-La.), unlike many of his colleagues, is an open proponent of using the tax system not just to create incentives, but to provide "subsidies." Tax leasing was ideal for him. The strong contingent of senators on the committee from frostbelt states in the Northeast and Midwest, where many of the beleagued, capital-intensive industries that use tax leasing are based, were under strong pressure to retain some or all of the provisions.

In the Finance Committee, the struggle was between this faction and the leasing opponents, headed by Dole, who was committed to raising at least $7 billion in new taxes from business by trimming the leasing provisions. Confronting all the committee members was the necessity of finding some combination of measures to generate $21 billion through new taxes in the next fiscal year.

A proposal to kill tax leasing altogether, sponsored by Sen. Max Baucus (D-Mont.), failed 15 to 5, as the committee worked well past midnight to produce a tax bill. The Durenberger proposal then went before the panel and won by unanimous vote, but the measure represents major cutbacks in the ability of corporations to buy and sell tax breaks.

In his effort to maintain tax leasing, Durenberger, with a great deal of help from Christian, had to make a series of concessions that will both cut in half the revenue losses, and which end corporate tax leasing Sept. 30, 1985, through a sunset provision unless Congress revives it.

In addition, many of the tax benefits that can be transferred are reduced in value. The investment tax credit, instead of a straight 10 percent credit available immediately, is spread out over three years. Depreciation benefits are far less beneficial than they had been and the length of the "lease" is restricted in a way to limit the flow of tax breaks.

Firms like General Electric will not be allowed to use tax benefit leasing to eliminate tax liabilities, or to get refunds from past years' payments, and companies with more than enough foreign tax credits, like Occidental Petroleum, will not be able to sell tax breaks.

It is not clear what the final outcome will be in a process where the legislation will go the the Senate floor, the House Ways and Means Committee, the full House, and a House-Senate conference committee.

What may have started, however, is an expanded debate over long-standing and fundamental issues of the economic efficiency and fundamental fairness of tax policy.