A photo caption in yesterday's Business section incorrectly identified Sen. David F. Durenberger (R-Minn.) as Sen. William L. Armstrong (R-Colo.).
The Senate Finance Committee handed its chairman, Sen. Bob Packwood (R-Ore.), a defeat in the panel's first actions on tax revision yesterday, voting down a proposal to subject interest paid on existing tax-exempt bonds to a new minimum tax.
But the committee then gave Packwood an informal partial victory, provisionally accepting his plan to retain current tax breaks for energy, agriculture and timber (an important Oregon industry). Amendments in those areas -- perhaps even to add new tax benefits -- are expected later.
Finance Committee members did not make a final decision on whether to apply the minimum tax to interest from municipal bonds issued after the effective date of any new tax law. In the Packwood plan, the effective date would be Jan. 1, 1987. That issue will be addressed later, when the committee reviews the minimum tax.
Instead, the panel voted, 19-0, in favor of a motion by Sen. Daniel Patrick Moynihan (D-N.Y.) to prohibit taxation of all current bonds, even if they are resold later. A proposal by Packwood to include all tax-exempt interest in the minimum tax, which affects only wealthy taxpayers, caused a sharp slump in the bond markets last Wednesday.
Packwood made the case to members, as he has repeatedly since the market slump, that leaving current tax-exempt interest out of the 20 percent minimum tax would let some wealthy Americans escape paying taxes. He pointed out that members of the Finance Committee have supported a strong minimum tax, and said that exempting existing municipal bonds from such a tax means "we are going to continue to see stories about very wealthy people, with incomes of millions of dollars, paying no tax."
Packwood voted for the Moynihan amendment, however, in what aides said was a deliberate signal to the markets that he will not seek to reinstate his original proposal on the floor of the Senate.
Dennis Holt, special projects manager for the Public Securities Association, said the market "is relieved that retroactivity has been removed" by the Finance vote. But he added that the market for tax-exempt bonds, which includes obligations by state and local governments as well as quasi-private development projects, would remain disturbed as long as there was a threat the minimum tax would cover any tax-exempt interest.
Despite the Finance Committee vote, trading in municipal bonds continued to be very light yesterday. "People are cautious and tentative," according to William L. Staples, senior vice president of Continental Illinois National Bank.
A number of major municipal issues are due to come to market today, including a $200 million offering by the state of Illinois. Whether the lack of a market in tax-exempt issues will force postponement of the sale is still up in the air, Staples said. Last week, New York City postponed a bond sale because of market conditions.
The committee's first session to rewrite the tax code (members met once last week but took no action) was punctuated by confusion. Packwood, for example, proposed a bond motion very similar to Moynihan's because he misunderstood the scope of the New York senator's amendment.
And there was no public indication as the committee adjourned that it had agreed to Packwood's proposals on energy and timber. Aides said later that the panel had tentatively approved those portions of the plan, and would move on to accounting and business-investment taxation starting today. Amendments in the energy area could come up today as well, they said.
Sens. Lloyd Bentsen (D-Tex.) and Charles E. Grassley (R-Iowa) talked about getting together on an amendment to mitigate an agriculture proposal. Sen. Russell B. Long (D-La.) said he wants to ensure that North Sea oil drillers who have already begun drilling operations can continue to write off their "intangible" drilling costs in one year.
But there was little discussion of changing the basic tax breaks -- the oil-depletion allowance, one-year write-offs for intangible drilling costs and lower capital-gains rate for timber sales -- that enjoy strong support on the committee.
Altogether, the Packwood proposal for natural resources and agriculture would bring in $700 million in revenue less than the current tax code over five years. The loss comes principally from the proposed extension of several energy tax credits that expired at the end of 1985.