Senate Finance Committee Chairman Bob Packwood said yesterday he expects to lose when the committee votes Monday on his proposal to make interest on tax-exempt bonds subject to a new minimum tax.
"With that vote, we will ensure that many people of great wealth and some corporations that make profits will pay no federal income tax," Packwood told reporters.
If his prediction proves correct, Packwood will be defeated on the first vote his panel takes on his plan for overhauling the tax code.
He said a defeat would not dampen his enthusiasm for tax revision, but congressional observers suggested it could set a disturbing precedent on a committee that already is considered less than enthusiastic about the idea.
Packwood suggested that his committee members cannot have it both ways: They cannot support a strong minimum tax designed to make everyone pay and, at the same time, oppose including tax-exempt interest on municipal bonds in that tax.
He passed out figures indicating that 79.4 percent of all tax-exempt interest is received by individuals with minimum incomes of $100,000 and 46 percent of tax-exempt interest goes to those with minimum incomes of $200,000. A married couple with two children and an income of $50,000 would have to own more than $500,000 in tax-exempt bonds to be covered by the minimum tax, Packwood's calculations showed.
"These are not mom-and-pop operations," Packwood said. "These are immense concentrations of wealth."
Other senators on the committee, however, had little trouble meshing the two ideas. Sen. Daniel Patrick Moynihan (D-N.Y.) said in a statement yesterday that he supports an effective minimum tax, but opposes placing it on investors who already have bought bonds on the assumption the interest earned on them would not be taxed.
Tax-exempt municipal bonds include not only securities that finance state and local governments, but also bonds issued by governments for private projects ranging from student loans and middle-income mortgages to factories.
Earlier drafts of Packwood's plan would have applied the minimum tax -- which kicks in if a high-income taxpayer shelters a large amount of income -- only to interest on new tax-exempt bonds.
But the version of the plan released this week called for taxing all tax-exempt interest on both current and future bonds.
The bond market responded by coming to a virtual standstill on Wednesday, although it began returning to normal Thursday and yesterday.
Exactly what will happen Monday is not clear. Moynihan is considering amendments to put tax-exempt interest under the minimum tax on a prospective basis, by taxing either newly issued or newly acquired bonds.
Sen. David Durenberger (R-Minn.) is said to be considering proposing leaving tax-exempt interest out of the minimum tax entirely.
Congressional sources suggested that defeat of this minimum-tax provision would set a precedent for stopping other portions of the Packwood plan limiting tax-exempt interest.
Another element of the minimum tax requiring companies to pay tax if their profits as reported to stockholders exceed their taxable income by too much also would tax interest that now is tax-exempt.
Twenty members of the House Ways and Means Committee signed a letter opposing the Packwood bond provision. The House bill would tax interest on newly issued nongovernmental bonds under its minimum tax.
Packwood yesterday said the idea of covering all tax-exempt interest under the tax came from the Treasury Department. He read an excerpt from a Treasury list of suggestions calling for a "phase-in of all tax-exempt bonds regardless of when acquired" into the minimum tax.
Previously, Treasury officials had said the idea was generated by Packwood's staff. Officials clarified the contretemps yesterday by saying that they recommended inclusion of all tax-exempt interest because it was the only way to satisfy the stricture of an airtight minimum tax demanded by Packwood. In retrospect, the Treasury sources said, the department should have made clearer its warnings that the markets would react negatively.
Separately, Packwood seemed to soften his stance on a proposal to repeal the deduction that companies take for the excise taxes and tariffs they pay. That provision, which would raise $62 billion over five years to help pay for lower rates for other taxpayers, has come under fire from senators who say it could lead to higher consumer prices.
Asked if he would accede to a request by 11 committee members to hold hearings on the proposal, Packwood said he would wait to see if the revenue is needed at the end of the tax-writing process. The excise proposal would be one of several options for raising revenue, he said.