The tax plan developed by Senate Finance Committee Chairman Bob Packwood (R-Ore.) would give a larger tax cut to poor taxpayers than the House version, but other groups of taxpayers would receive similar tax reductions under both plans, congressional sources said yesterday.
The proposal has received generally favorable reviews from Finance panel members, who were briefed by Packwood in individual meetings during the last two days. The plan was endorsed only as a starting point for drafting sessions the committee will begin next week, however. The proposal is expected to be made public today.
"It's a substantial improvement over the House bill, but that doesn't mean we're committed to vote for it," said Sen. Lloyd Bentsen (D-Tex.). "It's a good point to start from." He said other Finance members he had talked to felt the same way.
The House measure would give individuals an average tax cut of 9 percent, with reductions ranging from 75 percent for those earning less than $10,000 (who would largely be taken off the tax rolls) to less than 6 percent for those in the higher brackets.
According to a 15-page summary of the Packwood proposal that has circulated in lobbying offices all over town (but which senators were not allowed to take out of their meetings with Packwood), the plan would restrict the extent to which upper-income persons could take several deductions that they now may itemize on tax forms.
Such deductions as those for state and local income taxes, casualty losses and medical expenses could be taken as usual for taxpayers in the bottom two brackets of the tax plan, 15 percent and 25 percent. However, for persons in the 35 percent bracket, which would begin for married couples at $57,000 of taxable income, these deductions would be limited.
In the 35 percent bracket, a $100 deduction now saves $35 in taxes. Under the Packwood version, the same deduction could be taken only against the 25 percent bracket, and thus save only $25. Deductions for charitable contributions, home-mortgage interest and real-estate taxes would not be included in the proposed limitations, the document says. The limitations would raise about $25 billion to $30 billion in revenue to help offset the loss from lower tax rates.
A controversial provision of the House measure that would require retired federal workers to receive the taxable portions of their pensions immediately, rather than after the tax-exempt portion of the payments is exhausted, was not included in the Packwood proposal. Nor did it call for taxing the insurance provider Blue Cross-Blue Shield, as the House bill would.
Like the House bill, the Packwood plan would repeal the "marriage penalty" deduction for two-income couples and would eliminate income averaging.
The House bill would shift $140 billion in taxes from individuals to business over the next five years. Although figures for the Packwood plan are comparable, they do not take into account the proposed elimination of the deduction that companies may take for excise taxes and tariffs they pay. Sources said that change would raise $62 billion in additional revenue over five years. If all or most of that is passed on to consumers, however, the effect of individual tax cuts would be reduced.
Sen. George J. Mitchell (D-Maine) said he had expressed that fear to Packwood during their meeting yesterday. He pointed out that the figures showing that lower-income groups would receive large tax cuts would be smaller if the effect of the excise-tax deduction removal were shown.
"It's not possible yet to tell what flow-through effect this will have, whether it will result in an increase of prices to the consumer," Mitchell said. "Generally I do not favor raising excise taxes to reduce income taxes. That's raising a regressive tax to reduce progressive taxes."
The proposal also includes an increase in the current excise tax on wine that would raise $4 billion, and proposes that other excise taxes on alcohol, tobacco, gasoline and diesel fuels rise with inflation.