As a possible option to raise about $40 billion in 1986, Treasury Department officials are considering a 10 percent surcharge on individual, and possibly corporate, income taxes, according to sources.
In the last-minute drive to come up with ways to reduce long-range deficits as the budget is readied to go to press, the surcharge would solve a number of immediate political and practical problems, the sources noted, although it is by no means clear that Congress or President Reagan would approve such a tax hike. The advantages of the surcharge include:
For an administration committed to lowering tax rates, the surcharge could be portrayed as temporary, just as a similar 10 percent hike during the Vietnam War was imposed for just over a year.
At 9 to 10 percent, a surcharge on corporate and individual income taxes almost exactly fills the goal of raising one percent of the gross national product, the ceiling on tax increases set by President Reagan. A 10 percent surcharge would raise the amount of tax paid by an individual or corporation by one tenth. It would not add 10 percentage points to the individual's or corporation's marginal tax rate.
With a flexible deadline of this Friday for sending budget documents to the presses, the surcharge proposal is simple enough to incorporate quickly, as opposed to a set of complex, multiple tax hikes along the lines of legislation enacted last year.
In preparing the 1983 budget, officials then estimated 1986 corporate and individual tax receipts at about $485 billion, indicating that a 10 percent surcharge would raise $48.5 billion. Since then, estimates of economic growth have been reduced but taxes were raised.
Treasury Secretary Donald T. Regan has already ruled out a number of other tax hikes considered to have some justification on economic and equity grounds, including elimination of the deductions for state and local sales taxes, for non-mortgage consumer interest and for interest payments on second homes. Another proposal, a ceiling on the exemption for employer-paid health insurance, will be part of the next budget, but it is not part of the 1986 tax plan.
A Treasury spokesman said no final decisions have been made on what tax increases will be presented to the president, and that a number of alternatives are available.
Among the other alternatives in the effort to raise money are to rescind some tax cuts that are scheduled to go into effect or grow in 1986--an exclusion for interest receipts, charitable deductions for those who do not itemize, indexing the entire rate system--and some existing taxes that are to be phased out, including cigarette and telephone excise taxes.
The tax controversy is further clouded by administration plans to make the 1986 tax hike conditional on anticipated economic conditions. It is to be a "contingency plan," under which that taxes would only become effective if the projected deficit for 1986 remained above some target figure, perhaps 2 percent of the gross national product. There is no agreement on how this mechanism would work.
Such a triggering mechanism is likely to face strong opposition in Congress, where the chairmen of the two key tax committees are both inclined to oppose anything that could be described as a contingent or conditional tax hike.
An aide to Sen. Robert Dole (R-Kan.), chairman of the Senate Finance Committee, said Dole "does not favor a trigger mechanism, does not like the concept and would have to be convinced" that it could work. An aide to Rep. Daniel Rostenkowski (D-Ill.), chairman of the Ways and Means Committee, voiced similar doubts.