THE TAX PLAN that Senate Finance Committee Chairman Bob Packwood put forward last week uses a brilliant idea to achieve an awful result. Its distinguising feature is what it would do to excise taxes, the largest of which are on gasoline, alcohol and tobacco. It would raise the taxes themselves a little, then also take away a cushioning device, thereby increasing their bite a lot. Federal revenues and the prices of the taxed products all would rise, and society would be better off. Higher gasoline prices make sense for conservation reasons, higher alcohol and tobacco prices for health reasons -- and the government badly needs the money, which would come to about $75 billion over the next five years.
The bad news is what Mr. Packwood would do with the money. Instead of applying it to the deficit he would use it to add to the balm and shift the pain in the tax reform bill the House sent him last year, a trade-off in which rates and tax-reducing preferences were cut more or less in tandem. He would lower the tax rates of rich people more than the House, reduce certain business tax preferences less. Breaks that the House took away from the oil, timber and defense industries would be restored.
The president had told Mr. Packwood he wanted the tax bill to be revenue-neutral, but also wanted more rate reduction and fewer cuts in investment incentives than the House bill provided. At the same time his fellow senators were telling the Oregonian that they, too, wanted various House-trimmed preferences restored -- but wanted any major new tax or tax increase saved for deficit-reduction. Mr. Packwood was being called upon to spend money he was simultaneously being forbidden to raise. He solved the problem in part by proposing limits on state and local tax deductions. He has not completely spelled out what he has in mind, but we tend to think such limits are a bad idea.
But his major proposal was that businesses no longer be allowed to take deductions for the federal excise taxes they pay. Currently they can, which means that when excise taxes go up, corporate income taxes go down, not by the entire amount but by some. The Treasury itself thus pays part of any excise tax increase, and only part has to be borne by businesses and customers. Mr. Packwood would have them bear it all. It isn't quite an excise tax increase, but it quacks like one.
The result? The federal tax structure becomes less progressive; lower taxes for the rich and for business are financed by higher prices for everyone, including the poor. Fairness suffers in other ways; the oil, timber and other such tax breaks the House knocked out are among the most egregious in the code. Most of all, an otherwise defensible tax increase is wasted on balacing the tax bill instead of reducing the deficit. His committee may love the new chairman for it. So may the president. But the trade-offs in this plan are wrong.