When Senate Finance Committee Chairman Bob Packwood (R-Ore.) unveiled his tax-overhaul proposal last month, he seemed to have blazed his way through the tangled political forest of tax reform.
But Packwood's path to lower income taxes, resting largely on an effective increase in excise taxes on just about everything from gasoline to bows and arrows, appears to be leading the Senate's chief tax writer back into the thicket.
More than half the Senate, including some prominent proponents of tax overhaul, have signed letters raising concern that the excise tax changes would hurt those least able to pay. Some business and citizen groups that led the fight for tax overhaul in the House are threatening to defect.
And yesterday, industry and labor-financed groups released separate studies indicating that the excise provisions would cancel out about half the benefits of lower individual tax rates nationwide, with the lowest income group losing about four-fifths of its promised 77 percent tax cut.
"It looked like an innocuous way to raise tax revenues and at the same time preserve tax benefits for timber, oil, gas, mining and other special interests they wanted to accommodate," said Rep. Robert T. Matsui (D-Calif.), who helped steer tax-overhaul legislation through the House. "But now they have a real tiger by the tail, and they may have to release it."
Packwood's excise tax and tariff proposals are key features of his plan for meeting President Reagan's goal of lower tax rates. Cutting maximum personal income tax rates from the current 50 percent to 35 percent -- as Reagan has requested -- would cost the federal treasury $252.7 billion by 1991.
The excise and tariff provisions would supply $75 billion, almost one-third of that total. Among the provisions proposed by Packwood, the excise tax on table wine, now 17 cents a gallon, would rise to about 70 cents. Also, a wide range of industries would be prevented from deducting their excise taxes and import tariffs from their federal income taxes.
Without these excise and tariff provisions, the Finance chairman's proposal would greatly increase the federal deficit -- a result both he and Reagan have forsworn.
Packwood has said he would propose changes to benefit the working poor if the excise tax provisions are found to burden them.
He has scheduled a hearing April 21 on the excise tax provisions in response to requests from 55 senators, including 11 on his 20-member panel.
Packwood has said he is willing to compromise if other committee members can find ways to raise revenue without losing the support needed to carry the bill through a Senate stocked with powerful proponents of various industries.
The biggest chunk of this proposal requires gasoline, tobacco, liquor, airline and other industries that collect excise taxes to pay income taxes on the amount collected. Import tariffs paid by industries such as retail clothing, shoes and steel would be treated the same way.
That is, a diesel fuel dealer who collects 15 cents in excise taxes on a $1 gallon of fuel would be taxed on $1.15 of income. Under current law, the dealer would be taxed only on $1, because excise taxes and import tariffs are deductible as "legitimate business expenses."
Several analysts have said that this provision effectively increases most excise taxes by 54 percent. Because most industries pass along excise taxes to the consumer, the analysts said, a company under a 35 percent tax rate would have to pass on $1.54 to end up with $1.
Spokesmen for several industries hit hardest by excise taxes -- wine, hard liquor and trucking -- said yesterday that they would pass along the full effect of the tax to consumers.
"It would cost the trucking industry $3 billion in new taxes," said Thomas J. Donohue, president of the American Trucking Associations and head of an industry coalition that financed one of the studies released yesterday. "That's equal to the profits of the industry . . . . I can categorically say it would cost our support for tax reform."
A study by deSeve Economics for Donohue's coalition of truckers, distillers, tobacco firms, retailers and others assumed that 100 percent of the increase would be passed through to individual taxpayers. It found that the resulting increase in consumer prices would cancel out 83 percent of the tax cut for the lowest-income families, while reducing the cut at the top of the scale by about 7 percent.
Packwood has said that industries such as trucking are trying to have it both ways: passing the tax on to consumers while professing concern for people who would have to pay higher prices.
Another section of the excise provisions would raise the levy on wine so that its alcohol content is taxed at the same rate as the alcohol in beer, which is now much higher. A third section would index taxes on alcohol, tobacco and fuel so that those levies increase with prices.
The industries that account for the bulk of excise taxes are alcohol, tobacco and fuel, and some observers have suggested that Packwood may have found a politically palatable target in them: Why not pay for tax overhaul with higher "sin taxes" (alcohol and tobacco) and higher fuel taxes, which could be construed as spurring conservation?
But Packwood now faces a larger problem that goes to the heart of the tax-overhaul exercise. From the outset, it aimed to simplify the federal income tax structure, to close loopholes and to use the extra money to lower rates for all.
In a meeting with reporters this week, White House chief of staff Donald T. Regan referred to numerous special-interest provisions added to the House and Senate bills and said: "It's no longer simplification."
Numerous tax economists who support the overhaul in general have said in recent weeks that the excise and tariff provisions violate normal tax policy principles: In effect, they place a tax on a tax, while exempting from taxation certain income of oil, gas and timber operations.
But perhaps the biggest problem is the indication that the plan favors the wealthy over low- and moderate-income Americans.
"It confirms the concerns that I had when this proposal was first made," said Sen. George J. Mitchell (D-Maine). "It makes it very likely we'll have to look elsewhere for revenue."