President Reagan yesterday trounced conservatives in his own party and, hand in hand with Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.), won congressional approval of legislation raising taxes by $98.3 billion over the next three years.
By 226 to 207, the president continued his unbroken string of budget victories as the House passed and sent the Senate a record-setting tax increase bill 75 days before the Nov. 2 general elections. The Senate quickly followed suit, and sent the bill to the president by 52 to 47.
The House victory was achieved with strong Democratic support and at the cost of the near-perfect GOP unity that characterized earlier budget and tax fights. Democrats and Republicans both cast majorities for the bill, 123 to 118 among Democrats and 103 to 87 among Republicans.
The legislation, which Reagan and other supporters called necessary to hold down federal deficits and help bring down interest rates, is a reversal of last year's tax policy when king-sized cuts were enacted for business and individuals, particularly those in the upper brackets. It was this reversal that the House GOP conservatives fought.
The bill approved yesterday would take back many of last year's corporate tax cuts; raise cigarette and telephone taxes; mandate 10 percent withholding on interest and dividend income; repeal the 1981 provision allowing companies to sell their excess tax breaks; broaden a minimum tax on the rich; require federal employes to contribute to the Medicare system, and extend unemployment benefits through the November elections.
The bipartisanship on the House floor yesterday may keep either party from taking advantage of the tax increase in the general elections; the Democrats wanted the bill neutralized that way.
The president hailed passage last night and, in an appeal to the dissidents in his own party, said, "honorable men and women can honestly disagree . . . . Let's leave our differences behind us."
O'Neill, for his part, made a rare floor speech at the end of House debate "as a leader of the opposition party, opposed to the president on most of his programs and his philosophy." But, O'Neill went on, "the president is right and we need this tax bill. I ask you to vote for it."
In the final House count, it was the junior members of the GOP who cast most of the "no" votes among Republicans.
The House action was a major defeat for Rep. Jack Kemp (R-N.Y.), who was once one of Reagan's most loyal supporters, but yesterday was the leader of the conservative opposition, continuing to wave the flag of supply-side economics.
"I'm as loyal as anyone in this room to the president," Kemp said, looking at the GOP side of the House floor where many members have privately suggested that he has been working to undermine Reagan to further his own presidential ambitions. "I don't think loyalty requires a sacrifice of conscience, principles and belief." Kemp added: "Whether we call it reform, compliance, or a tax increase, we are taking $100 billion out of the American economy." The shifting political tenor of Congress was exemplified with sharp clarity when Rep. Guy Vander Jagt (Mich.), head of the Republican Congressional Campaign Committee, rose to support the bill on the grounds that it will help correct a situation in which four corporations making over $500 million last year paid no federal taxes.
Support for the bill in the House came mainly from the senior and centrist elements of both parties. Its opposition was an unusual alliance of young Republican conservatives committed to low-tax, supply-side economics, Democratic liberals, particularly blacks, angry at the budget cuts the administration has forced through Congress, and a number of Democrats and Republicans up for reelection in marginal districts fearful of the consequences of a vote in support of the bill.
In the Senate, support for the bill was more partisan: Republicans split 43 to 11 in favor of the bill, while Democrats were opposed 35 to 9. Sen. Harry F. Byrd (Ind.-Va.) voted against the bill.
Many House Democrats used the opportunity to argue that the Reagan-endorsed tax increase is a demonstration of the failure of the budget and tax-cutting policies that characterized Reaganomics in 1981.
"This is a tax bill that concedes the unworkability of supply-side economics," Rep. John Conyers Jr. (D-Mich.) declared. Rep. James M. Shannon (D-Mass.) said that the Reagan administration was backing a tax increase out of "fear, absolute terror of what would happen if we did not pass this bill."
The bill's major provisions: Taxes
Interest and dividends: Beginning July 1 taxes will be withheld from dividends and interest at a rate of 10 percent. The first $150 of interest paid a taxpayer will be exempt, as will all payments to low-income taxpayers (those with prior-year tax liabilities of $600 or less on single returns or $1,000 on joint returns) along with most payments to persons over age 65. This is expected to raise $10.5 billion from 1983 through 1985.
Federal employe Medicare: Beginning next year federal employes automatically will become eligible for Medicare but will have to pay the Medicare portion of the Social Security tax, 1.3 percent for the first $35,100 of pay. This would raise an estimated $2.4 billion through 1985.
Cigarettes, telephones: The federal excise tax will be doubled from 8 cents to 16 cents a pack Jan. 1. The telephone excise tax will be raised from 1 to 3 percent. Through 1985, these taxes are expected to raise $8.3 billion.
Medical and casualty deductions: Beginning next year only medical costs in excess of 5 percent of adjusted gross income (AGI) can be deducted, replacing a threshold of 3 percent. Only casualty and theft losses in excess of 10 percent of AGI will be deductible; the previous threshold was $100. These provisions would raise an estimated $5.2 billion through 1985.
Air fares, airports: The air ticket tax will go from 5 to 8 percent, there will be a $3 fee for each international departure, the tax on fuel for private aircraft will be 12 cents a gallon for gasoline and 14 cents for jet fuel. These taxes are expected to raise $2.9 billion over three years and most of that revenue will be used for airport improvements.
Minimum tax: The add-on minimum tax on wealthy individuals will be repealed, but the alternative minimum tax would be significantly enlarged. About 280,000 persons who currently pay little or no federal tax would have to pay an average levy of $2,200 a year more. The broadened tax is expected to raise $1.4 billion through 1985.
Pension set-asides: Tax benefits to persons who incorporate, including many doctors and lawyers, will be severely restricted. They now can set aside for retirement and shelter from current taxation up to $157,000 in income annually; this will drop to about $100,000. At the same time, the maximum contribution to so-called Keogh (or H.R. 10) plans will be raised from $15,000 to $30,000 annually. The pension provisions would raise an estimated $1.8 billion by 1985.
Compliance: Reports to the Internal Revenue Service of many capital gains transactions and the registration of most bonds will be required. The bill also will increase penalties for the promotion of abusive tax shelters and tax fraud. A proposal to halve the deduction for business meals was dropped in conference committee and replaced by a requirement that hotel and restaurant operators report to the IRS an estimate of the tip income of waiters and waitresses. These provisions are expected to raise $10.2 billion over three years.
Business taxes: New limits will be placed on the investment tax credit; an accelerated depreciation provision scheduled to take effect in 1985 will be eliminated; the value of six corporate tax preferences will be reduced by 15 percent; the tax breaks for corporations involved in non-residential construction will be cut back. These provisions would raise an estimated $12 billion by the end of 1985.
Leasing: Last year's provision permitting the sale of excess tax breaks through "safe harbor leases" will be repealed Jan. 1, 1984. The three-year revenue gain is expected to be $7.9 billion.
Insurance companies, contractors: Special tax breaks for life insurance companies using subsidiaries and for long-term contractors, particularly those in the aerospace and defense industries, will be reduced, raising an estimated $12.7 billion through 1985. Spending
Medicare: Spending would be cut $13.3 billion over the next three years, mainly through new limits on payments to hospitals and doctors and a limit on how much per-patient payments to any one hospital can rise in a year.
Unemployment: To keep providing benefits to the long-term unemployed, the bill reverses a cut voted last year and tacks on an extension: More than 39 weeks of benefits will be available in many states and up to 49 in some, rather than the 26 weeks available under the basic unemployment aid program. To finance the program, the cutoff point for taxing unemployment benefits will be lowered. A single person whose total annual income exceeds $12,000 would have to pay taxes on unemployment benefits. In a joint return, the figure would be $18,000. Under current law these figures are $20,000 and $25,000 a year. In addition, to shore up the program generally, the unemployment tax paid by employers will go up by about $6.5 billion over the three years.