Senate and House conferees neared agreement last night on a compromise measure to repeal the 10 percent withholding of taxes on dividend and interest income that was to have gone into effect July 1.
Paradoxically, agreement on repeal of withholding, which is expected to reduce federal tax revenues by $13.4 billion over the next three years, came only a few hours after a reluctant House Ways and Means Committee took up Congress' self-imposed mandate to raise $73 billion in new revenues over the same period.
This apparent contradiction was not lost on the conferees, who accepted a compromise engineered by Rep. Barber B. Conable Jr. (R-N.Y.) to limit the revenue-reducing impact of repealing the withholding provision.
Conable's proposal would allow the Internal Revenue Service to impose "backup withholding" on taxpayers who fail to report dividend or interest income. It also would give the IRS at least $300 million to hire more workers to track down the delinquents.
Withholding of dividend and interest income at the source was the largest single tax-compliance provision of the 1982 tax act. It never took effect because the Treasury Department, anticipating repeal as Congress ducked for cover in the face of a lobbying blitz by the banking industry, deferred enforcement until the end of this month.
Both Ways and Means Chairman Dan Rostenkowski (D-Ill.) and Senate Finance Committee Chairman Robert J. Dole (R-Kan.) opposed repeal, but they were stampeded by colleagues responding to an avalanche of constituent mail.
Yesterday's agreement, like the inconclusive debate over new taxes that preceded it, illustrate's Congress' difficulty in developing consistent tax and revenue policies.
At Dole's insistence, the Senate loaded the repeal bill with a package of complex tax-enforcement provisions, plus several unrelated measures. One, the Reagan administration's proposal to extend trade and tax assistance to 28 friendly Caribbean countries, was accepted by the conferees Tuesday, possibly making the repeal bill palatable to the president, who has promised to veto it.
They eliminated one measure attached by the Senate, tax incentives for development in "enterprise zones." But they recessed without agreement on an indefinite extension of states' authority to issue tax-free mortgage subsidy bonds to aid homebuyers. They said they expect to conclude Thursday.
At the Ways and Means hearing on possible tax increase measures, Rostenkowski noted that most members of Congress agree that the U.S. economy cannot indefinitely sustain deficits of $200 billion a year but that powerful forces are lined up to oppose any tax move Congress makes.
"Bucking the forces of inertia, beginning with the president, will take an extraordinary act of political courage," Rostenkowski said.
The Reagan administration opposes any tax increase in 1984 or 1985 but has proposed "contingency taxes" to be imposed beginning in 1986 if deficits remain high. They would raise $46 billion a year with new levies on oil and income.
This proposal elicited little enthusiasm at the hearing. Representatives of major business groups, including the National Association of Manufacturers and the U.S. Chamber of Commerce, said that any tax-increase bill now would abort the economic recovery.
But the AFL-CIO asked for measures that would virtually wipe out the cuts in personal and corporate taxes that Congress enacted at Reagan's behest in 1981.
Stephen Koplan, a lobbyist for union, called for repeal of indexing, the automatic adjustment of personal income tax rates to protect individuals from "bracket creep," and said that this alone would raise revenues $16.7 billion in 1986.
He also said that labor wants lower limits on the tax deduction for individual retirement accounts, the phase-out of the capital gains tax and the repeal of the accelerated depreciation schedules written into the 1981 tax act as an incentive for business to invest in new equipment.