One month after President Reagan submitted his tax proposal to Congress, House tax writers are flailing.
Members of the Ways and Means Committee are stymied in their search for an alternative to Reagan's plan. They dislike the economic pain that the president's bill would inflict on some groups, but they have not yet found a better way to allocate that pain.
During 85 hours of hearings in the past four weeks, legislators voiced objections to almost every element of the plan that would raise taxes on someone. They complained that ending the deduction for state and local taxes would hurt the middle class. Terminating a tax credit that subsidizes investment in equipment would slow the economy. Taxing life-insurance policies' increase in value would hurt the elderly.
But with the hearing schedule half-completed and bill-writing tentatively planned for the fall, Ways and Means members are talking about how to lessen the impact on those groups and others, not about how to shift the burdens elsewhere.
The nature of tax restructuring makes such a shift necessary, however: In order to bring in the same amount of revenue to the Treasury as the current code does, deductions and credits must be curtailed to compensate for lowering tax rates. If Congress can't curtail the deductions by as much as it lowers rates, the federal deficit goes up.
That dilemma has led to political paralysis within the committee. Only the broadest changes that will be made in the Reagan proposal are clear, and only a few effective coalitions against particular provisions have emerged. Nor is it obvious whether committee members want any tax-revision bill enough to overcome the objections of the current tax code's beneficiaries.
"Some of us were talking on the floor the other day about where everybody is and where everyone is coming from," said Rep. James R. Jones (D-Okla.). "The answer is, nowhere. Everybody is circling in the water and looking at the fish."
Although no coalition can claim more than a few members, individual legislators have attached themselves to many issues. New York Reps. Raymond J. McGrath (R), Thomas J. Downey (D) and Charles B. Rangel (D) are staunch opponents of ending the deduction for state and local taxes.
Reps. Bill Archer (R-Tex.), J.J. (Jake) Pickle (D-Tex.) and Jones can be expected to defend the interests of oil and gas producers, especially if the committee tries to gain back revenue by curtailing oil and gas tax benefits more than the Reagan plan would.
Rep. Donald J. Pease (D-Ohio) doesn't want to hurt heavy industry, such as steel, so he may defend generous write-offs for investment in manufacturing. Reps. Barbara B. Kennelly (D-Conn.) and W. Henson Moore (R-La.), probably will fight several provisions that would raise taxes on insurance companies and their policyholders.
Rep. Wyche Fowler Jr. (D-Ga.) worries that curtailing entertainment deductions for business could hurt the convention trade. Rep. Sam M. Gibbons (D-Fla.) thinks cutting back on the foreign tax credit might harm U.S. industry abroad, because companies would no longer be allowed to shelter income from high-tax countries by averaging it with income from countries with lower taxes.
Other Ways and Means members will fight provisions curtailing tax benefits for vacation homes, ending charitable contributions for taxpayers who don't itemize their deductions and changing the tax-accounting methods for small businesses.
Few of those complaining are suggesting ways to make up the federal revenue that preserving their favorite tax breaks could cost the Treasury, even though Ways and Means Chairman Dan Rostenkowski (D-Ill.) has said his committee will not approve a tax cut.
"When you're talking among yourselves, you're talking about the negative impact, not where you're going to get the money," said McGrath of New York.
Rostenkowski is one of the few committee members looking at alternatives to the whole package. For the past two weeks, he and a handful of staff aides have been meeting privately to hash out, over a blackboard, the economic merits and the political feasibility of various plans.
Aides are close-mouthed about what alterations are being debated, and say no decision has been made on whether the committee will start writing a bill based on Reagan's plan or use some other version as a starting point.
Though he has criticized several elements of the president's package, Rostenkowski won't decide the shape of his own until he has met with every committee member and completed other consultations, including weekly lunches with committee Democrats representing different parts of the country.
Meanwhile, Rep. Carroll A. Campbell Jr. (R-S.C.) is formulating an alternative proposal on the Republican side. He is looking for a way to avoid giving an extra-large tax cut for upper-income taxpayers, a difficult task when combined with a drastic reduction in the top rate. Solutions could include a rejiggered rate structure of 15 percent for the lowest bracket, then 24, 34 and 37 percent, Campbell said.
Some of the general changes the committee will make in the plan have become clear:
* The ultimate legislation will do more for middle-income families, especially working couples, than the Reagan plan. It's unlikely, however, that that will be achieved by raising the top rate much.
When Rostenkowski suggested that his committee might look at a higher tax rate for the well-off on top of the brackets of 15, 25 and 35 percent in the president's plan, Reagan quickly rejected the idea.
The committee is more likely to change the distribution of burdens by raising the effective tax rate on capital gains, profits on the sale of an asset. The Reagan plan would reduce the top capital-gains rate to 17.5 percent; House tax writers are thinking of keeping it at 20 percent.
* Several compromises on deductibility of state and local taxes are being discussed. One would retain deductibility for certain kinds of taxes, such as property taxes. Revenues from property taxes generally pay for education, and legislators will be under heavy pressure from school-board and teacher lobbies not to do anything that could reduce funds for schools.
Sen. David F. Durenberger (R-Minn.) has proposed permitting all state and local taxes to be deducted, but only above 1 percent of adjusted gross income. That would give all taxpayers who itemize their deductions some benefit, without unduly affecting states and cities that depend on one kind of tax more than another.
* Effective dates, transition periods and "grandfather" clauses, which protect people who are already using a particular provision of the law, will probably be more widespread and more generous that in the Reagan plan.
For example, Congress is almost sure to let companies that enter into contracts to buy equipment or buildings before the law is passed use the old tax law to write off those investments, even if the purchases are carried out after the new law is enacted. Any revision bill is also likely to make the termination of deductions and the reduction in rates effective at the same time. Under the Reagan plan, the rate reduction kicks in six months after many deductions are wiped out.
* A provision to raise taxes on companies that have taken heavy advantage of depreciation write-offs in the past few years seems destined for alteration. The idea is to recoup from companies the "windfall" they would get from paying back deferred taxes at a lower rate than was effective when they began the deferral.
One alternative would be to narrow the kinds of investments to which the new tax would apply, and make the new system of writing off investments less generous than under the Reagan plan in order to make up the lost revenue.
Even before compromises are made, legislators fear the Reagan proposal would increase the deficit substantially. After the Congressional Budget Office reported last week that the four principal business provisions of the plan would bring in as much as $19 billion less per year in the long run than the current system, Rostenkowski said he might ask Treasury to propose measures to make up the difference.
In the meantime, he and other committee members say Reagan's recent decision to consider restoring to his plan the deduction to alleviate the "marriage penalty" and the credit for child care could hurt, not help, the cause of tax revision. If the administration gives away all the easy compromises, there will be nothing left for the Ways and Means committee but the pain of raising more revenue, the theory goes.
"I'm not going to hang around all July and go to 8 a.m. meetings and sit through these boring hearings if he's going to give away little fillips here and there," said Rep. Fortney H. (Pete) Stark (D-Calif.).