The beaming faces that surrounded Chairman Al Ullman (D-Ore.) outside the House Ways and Means Committee the other night were not the ones usually found smiling over the approval of another tax bill.
"Damn, it's nice to win one for a change," exclaimed the committee's Republican counsel, John Meagher.
Conservative Democrats and Republicans - men like Reps. Joe Waggonner (D-La.) and John H. Rousselot (R-Calif.) - shook Ullman's hand enthusiastically as he walked back to his office after a brief performance for the TV cameras. The people from the American Council for Capital Formation, strong advocates of the trickledown blessings of wealth, added their accolades.
The mood in Congress, and the country, has changed remarkably since President Carter made tax reform one of the central themes of his campaign just two years ago. Reforms are in the wind all right, but not of the kind Carter had in mind. At markup sessions on what is now quite simply the proposed "Revenue Act of 1978," the Ways and Means Committee last week gleefully refused even to disallow business deductions for more than 22 martinis (for one person) a day or yachts exceeding 35 feet in length.
For the increasingly hapless liberals in Congress, tax reform this year simply means maintaining the status quo and even that appears unlikely. The pentup frustrations of the rich and would-be rich, of entrepreneurs who want to raise money and of middle-class taxpayers tired of paying it out, are making themselves felt.
The $16 billion tax-cut bill the Ways and Means Committee approved Thursday night, with most of the benefits aimed at middle- and upper-income taxpayers, had been stalled there for weeks. The big struggle was over capital gains, the profits from the sale of stock, a home or other property, and how such profits should be taxed. It has become the hottest tax issue on Capitol Hill.
To the chagrin of the Carter administration and organizations such as Public Citizens Tax Reform Research Group, the focus for that sentiment became a bill that no one expected to get anywhere when Rep. William A. Steiger (R-Wis.) first proposed it in April.
Styling it the "Investment Incentive Act of 1978," Steiger would return capital gains taxation to the days before 1969 by:
Removing capital gains from the list of various kinds of income subject to the "minimum tax" - a special levy first enacted in 1969 to prevent wealthy investors from escaping payment of any taxes.
Reducing the maximum tax rate on capital gains to 25 percent from its present maximum of almost 50 percent. (Hardly anyone pays over 45 percent; the average effective tax rate on capital gains in 1976 was actually 15.9 percent, a slight increase over the Tax Reform Act.)
Secretary of the Treasury W. Michael Blumenthal denounced the proposal as "a millionaire's relief bill" 14.1 percent average before the 1969 and protested that it had nothing to do with "the so-called 'middle-class tax revolt'" loose in the land.
No matter. Support for the measure mushroomed, Sen. Clifford Hansen (R-Wyo.) took up the cause in the Senate and collected more than 60 cosponsors. Timber interests, the securities industry, real estate investors, the heads of the New York and American Stock Exchanges, small businessmen and entrepreneurs trying to raise money for new ventures joined in. So did homeowners such as Rep. Sam Gibbons (D-Fla.). He's still wincing over the taxes he had to pay a couple of years ago when he and Mrs. Gibbons sold the suburban Virginia home in which they're raised their family.
"All it was tax on inflation," Gibbons says of the increased value of the house. "And it was a lulu."
Actually, relatively few homeowners pay capital gains or minimum taxes when they sell their homes now because of special rollover provisions tied to the purchase of another home and because of partial exemptions for retired persons. In addition, the administration's own proposals would have exempted home sales from the minimum tax. But such distinctions have gone largely unnoticed in the clamor over the Steiger amendment.
One of the leading spokesmen for the capital gains lobby, Charles Walker, a former deputy secretary of the treaury, readily acknowledges that the typical homeseller isn't helped by the Steiger amendment itself or by Oklahoma Democrat James R. Jones' substitute, which the committee adopted. But in Walker's view, it doesn't matter that much at this point.
"In this game," Walker, chairman of the American Council for Capital Formation, adds cheerfully, "it's the perception that counts."
As David G. Rahn, executive director of the council, which has about 400 members at present, sees it, "everybody in the country, rich or poor, wants to be rich and he doesn't want to have that opportunity taken away from him. We still have that Horatio Alger streak in us."
The campaign had its origins early this year with the House testimony of Edwin V. W. Zschau of the American Electronics Associations, an organization of 950 firms alarmed by the difficulties of raising capital these days. In its view, today's capital gains tax system is one of the chief villains.
"The boss was quite interested in what he had to say," a Steiger aide recalls. Encouraged by follow-up talks with Walker and others, the Wisconsin Republican introduced his bill.
Before long, the drive took on the flavor of a political campaign, complete with blue-on-white "Steiger-Hansen" buttons that blossomed last week. The timber industry, already heavily represented on the board of Walker's Council for Capital Formation, sent its representatives to Capitol Hill. Spokesmen for Mead paper visited the offices of Rep. William Brodhead (D-Mich.), a liberal member of Ways and Means. Officials of the Wyerhaeuser Co. sounded out Rep. Joseph Fisher (D-Va.). The Forest Industries Committee on Timber Valuation and Taxation came up with a slide show on timber taxation at the Rayburn Building.
"Timber companies will benefit disproportionately because they have such a big amount of income they can all capital gains," says Robert S. McIntyre, a Tax Reform Research Group attorney. According to a 1972 study of the Joint Economic Committee, the biggest timber companies "are able to shift nearly all their income into the lightly taxed capital gains category."
After holding back for awhile Wall Street also "woke up," as Steiger puts it. E. F. Hutton, Merrill Lynch and other major brokerage houses sent out mailings on the issue. The president of the New York Stock Exchange, William M. Batten, visited with House Speaker Thomas P. O'Neill Jr. (D-Mass.) and several members of Ways and Means in mid-July to pump for the Steiger amendment and a Wall Street add-on that has yet to take hold: a tax exemption for the first $1,000 of any capital gain.
Rebuffed by the administration in early May when he urged a quick alternative to defuse Steiger's proposal, Ullmann enlisted Jones to come up with a somewhat less drastic plan. he proposed a maximum capital gains tax rate of 35 percent and sharp inroads on the minimum tax. The administration calculated the lost revenue at $1.3 billion a year and said it was still unacceptable.
At markup sessions last week, however, what the administration thought was no longer particularly important. What is now "the Jones-Ullman bill" proved unstoppable. Its supporters even managed to strengthen its middle-class appeal - and to blunt charges that it would benefit only the wealthy - by adding an automatic inflation adjustment for all capital gains, starting in 1980, and by giving homeowners a once-in-a-lifetime chance to keep the first $100,000 in profits from a home sale, without paying any taxes at all.
Committee liberals had actually discussed a homeowner exemption over lunch Wednesday, as an alternative that might squelch the Jones "compromise," but the Jones-Steiger forces seized on the idea as their own before the opposition could offer it.
"We were going to bomb them with that," Brodhead said later. "Obviously it would have been a feather in our cap if we'd had that in our proposal and they didn't. But the word must have gotten out."
The committee approved the Jones-Ullman bill by a vote of 25 to 12. The majority included 12 Republicans and 13 Democrats.
Chatoic floor fights still lie ahead. In the Senate, Finance Committee Chairman Russell B. Long (D-La.) has indicated his panel will make still sharper cuts in the capital gains tax structure, perhaps by reducing the taxable portion of any gain. That could be done without scuttling the minimum tax and might prove more palatable to the White House. In any event, Ullman and others are confident that the president will be willing to sign that Ways and Means has wrought if it survives the pitfalls to come.
As for Steiger, he's still counting on Sen. Hansen and his colleagues to restore his bill to full strength. Had Steiger thought this wouldn't happen, he told a reporter, he would have insisted on putting his Investment Incentive Act to a test in the Ways and Means Committee. Head-counters there concede that he probably would have won.