The Senate last night approved a 10 percent withholding tax on dividend and interest income, a move almost assuring passage of legislation that would raise taxes by $98 billion over three years. The vote was 50 to 47.
The withholding proposal, bitterly opposed by the savings and loan and banking industries, along with many other special interests seeking to kill the entire package, was the last major hurdle to passage facing the bill.
The Senate continued working early this morning in an effort to reach a final vote.
The tax bill represents a shift in policy from last year when Congress enacted a $749 billion, three-year tax cut that skewed the breaks to those in the upper income brackets and provided sharp reductions in corporate taxes.
The pending bill would set a peacetime record for tax increases, and most of the burden--about 75 percent in the early years and much more later--would fall on corporations and the well-to-do.
In a strong closing speech just before the withholding tax vote, Majority Leader Howard H. Baker Jr. (R-Tenn.) said defeat of the proposal would mean "this bill will have lost meaning . . . was the budget resolution a paper tiger, or did it have teeth?"
The tax package is a critical part of the congressional budget resolution adopted earlier this year. In an effort to reduce the 1983 deficit to $103 billion, the resolution mandated slightly more than $20 billion in tax increases.
The leading opponent of the withholding tax, Sen. Robert W. Kasten Jr. (R-Wis.), contended it would be counterproductive to ending the recession.
"Savings and investment are key to economic growth," he said. "We should stand hand in hand with the people who are now investing."
As a sweetener to the 10 percent tax, the holding period for capital gains would be reduced from a year to six months. In addition, a separate amendment would index to the inflation rate the taxable value of stocks and property after 1985 when calculating capital gains taxes.
Banks, savings and loans and companies paying dividends will automatically withhold 10 percent and turn it over to the Internal Revenue Service, unless the recipient qualifies for an exemption.
Those exempt would include persons whose tax liability the prior year was $600 or less (or $1,000 for joint returns), those whose interest income is less than $100 for the year and the elderly with moderate incomes or less.
The 10 percent withholding rate is arbitrary. It has no direct bearing on the rate that any given tax payer will have to pay. Instead, it is a device to accelerate tax collections and to ensure that those who have evaded taxes on dividends and interest will be forced to comply with the tax law.
In the House yesterday, preliminary efforts to put together a parallel tax bill fell apart.
Ways and Means Committee Democrats began exploring reduction of some key tax breaks for the oil industry but backed off, fearing that any significant change in the Senate bill could turn the measure into a "Democratic tax hike," a political liability that House Democrats are seeking to avoid.
Instead, the committee Democrats began to consider accepting the Senate tax bill without amendment, in order to keep responsibility for the proposal on the GOP, which controls the Senate, and the administration.
Committee Chairman Rep. Dan Rostenkowski (D-Ill.) said the oil industry "blew me right out of the water."
He and Barber B. Conable Jr. (N.Y.), ranking committee Republican, had worked out the tentative proposal that included the hike in oil taxes.
If the House allows the Senate to retain full control over the legislation, it would represent an extraordinary adandoning of the traditional and constitutional role of the House.
Under the Constitution, all revenue-raising tax measures are to originate in the House.
House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.) said, however, "I think it ought to be a Republican bill . . . they are responsible for the deficit . . . . I don't think my people should be bound in any way to support a tax bill."
During the afternoon, the Senate reception room just off the floor was full of corporate lobbyists, many pressing for adoption of an amendment that would restore some of the major business tax cuts enacted last year.
In a reflection of the shifting mood of Congress, the lobbyists took it on the chin as the amendment, sponsored by Sen. Mack Mattingly (R-Ga.) was rejected, 72 to 23.
Earlier in the day, the Senate fended off most bids by tobacco state legislators to kill a doubling of the tax on cigarettes to 16 cents a pack.
But it did agree to eliminate the increase after 1985 in an apparent effort to keep such members as Jesse Helms (R-N.C.) and Strom Thurmond (R-S.C.) on board for the final vote.
After the votes on withholding and business tax breaks, Richard Rahn, chief economist for the Chamber of Commerce, declared with a slightly embittered smile, "The forces of darkness have won."
Other major provisions of the bill, raising $21 billion in 1983 and $98 billion from fiscal 1983 through 1985, are:
* New reporting requirements that would force withholding on tip income received by waiters and waitresses, and reports to the Internal Revenue Service of capital gains transactions. Combined with beefed-up IRS hiring, these provisions are to produce $7 billion in 1983.
* Deductibility of major medical expenses would be reduced. Medical fees above 3 percent of income can be deducted now, and the bill would raise this to 7 percent.
* Minimum tax on wealthy individuals who currently use deductions and credits to avoid most or all tax liability would be broadened, raising $227 million in 1984 and $262 million in 1985.
* The 1981 law allowing corporations to buy and sell tax breaks would be severely restricted, then phased out in 1985. This would raise about $7.2 billion over three years.
* The law governing corporate pension plans, which provides lucrative tax breaks and has encouraged many doctors and lawyers to incorporate, would be restricted. The amount of income that could be sheltered from taxation annually would be lowered from a maximum of about $157,000 to about $100,000.
* Special tax breaks that have allowed multiyear contractors, particularly those in the defense and aerospace industries, to postpone for long periods payment of tax would be limited and special loopholes available to the insurance industry would be eliminated.
* Airport user fees would be established in some cases and beefed up in others. The airline ticket tax would increase from 5 to 8 percent and a $3 fee would be charged those taking international flight. Aircraft gasoline would face a 12-cent-a-gallon tax, while jet fuel would be taxed at 14 cents a gallon.
The 1 percent telephone excise tax would be raised to 2 percent in 1983 and 3 percent in 1984 and 1985 before dropping to 2 percent thereafter.
Sens. Harry F. Byrd (Ind.-Va.) and Paul S. Sarbanes (D-Md.) opposed the 10 percent withholding tax on dividend and interest income while Sens. Charles McC. Mathias (R-Md.) and John W. Warner (R-Va.) backed it.