House Democrats reached general agreement yesterday that the scheduled July 1 income tax ought to be limited, but stopped short of endorsing the $700 limit proposed by Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.).
After a caucus requested by freshman Democrats, Majority Leader James C. Wright Jr. (D-Tex.) reported that "We had about 40 guys speak, and when you get 40 Democrats speaking you get 45 opinions. There is a consensus we have to do something" to curtail the withholding reductions scheduled for July 1, he said, but "there is a divergence of view" about what specific action to take.
O'Neill proposed Monday that the third year of the tax cuts pushed through Congress in 1981 by President Reagan--which O'Neill described as "a program of the rich, by the rich and for the rich"--be adjusted so that no individual or couple would have a tax reduction greater than $700 for 1983.
But he did not propose legislation containing that exact amount. Instead, O'Neill is polling House Democrats, asking whether they want a cap of $700, some other cap, outright repeal or deferral of third-year tax cuts, or no action. He agreed to abide by the results.
The Democrats are advocating the cap in part to reduce the deficit and in part for reasons of equity, to limit the tax cut of the rich. A $700 cap would add about $6 billion to revenues next year.
One possible political problem with this is that the cap would not fall hardest on those in the highest income brackets but on the upper-middle income group. Those in the top brackets got most of their tax cut in the first installment of Reagan's three-year plan; they have less to lose now. In relative terms a $700 cap would fall hardest on taxpayers with adjusted gross incomes of $45,000 to $75,000 per year.
A second problem is that the cap may be perceived as a tax increase; it will certainly be portrayed that way by Reagan. "I support the cap, but we should have no illusions that it's totally without political risk," said Rep. James M. Shannon (D-Mass.).
Ways and Means Chairman Dan Rostenkowski (D-Ill.) has also been unenthusiastic about any move that might put the onus of raising taxes on the Democrats. He announced yesterday that the committee will hold a hearing on the administration's revenue proposals.
Assuming an average level of itemized deductions, the $700 cap would begin to affect a couple with two children filing a joint tax return with an income of slightly less than $50,000. Single taxpayers would see their tax cut trimmed when their income approached $40,000.
Also, the cap wouldn't actually be $700; that is a misnomer. Half of this year's 10 percent tax cut is already in effect in the withholding tables; the $700 limit would apply to the second half still to come.
For example, under current law, the couple with $50,000 in adjusted gross income will get a tax cut this year of $807, as their tax bill drops from $8,376 to $7,569 (assuming only one spouse had earned income.) With the proposed cap, their tax bill would be $54 higher than under current law. They would still get a cut of $753 compared with 1982.
The maximum cut for a married couple this year under current law will be $3,447. With the cap, the maximum would be $1,963.
A single individual with a $40,000 income will pay $7,233 in taxes this year, compared to $8,016 in 1982. This $783 tax cut would be reduced to $717 by the cap. The maximum cut this year for a single individual this year will be $1,845, which the cap would reduce to $1,315.