The Senate Finance Committee voted to maintain a $7.4 billion tax advantage for retiring federal workers yesterday, a decision that would let them continue receiving tax-free pensions for up to three years after retirement.
The unanimous voice vote was a blow to committee Chairman Bob Packwood (R-Ore.). He opposed the amendment on the grounds that it would drain the federal treasury of tax revenue needed to pay for lower rates in his tax-revision bill.
But it was a victory for federal workers' organizations, which had lobbied against Packwood's proposal and the House-passed tax-revision bill. Both of those versions would require that the tax-free portion of pensions, that part paid into the pension system by the employes, be blended with the taxable portion immediately upon retirement. That would require pensioners to pay taxes immediately, rather than up to three years later.
"We're ecstatic about it," said a spokeswoman for the American Federation of Government Employees.
The vote came as the panel adopted comprehensive changes in tax-deferred and employer-provided retirement plans that, proponents said, would make retirement pensions available to 17 percent more workers in the future than would otherwise be covered.
The price for that expanded coverage was high: The pension amendments adopted yesterday would reduce tax revenue by $10.6 billion over five years, making it harder for the massive legislation to bring in as much money as the current tax system.
The pension provisions of the House tax bill would raise roughly $22 billion in revenue over five years. Altogether, the Packwood plan is now $25.1 billion in the hole over the five-year period.
Packwood said that "clearly, the committee will have to come back" to areas where it has agreed to preserve tax benefits. But in an interview, he rejected changing the pension provisions or the other costly compromise in the package, on business writeoffs for investment.
Packwood said he will present revenue-raising alternatives to his committee toward the end of the tax-writing process, when he and others have predicted a sort of "resurrection day" for the tax bill.
The principal changes adopted in the pension area were:
A combined limit of $12,000 a year on the amount that a taxpayer may set aside tax-free in an Individual Retirement Account and a 401(k) savings plan. Under the House bill, every dollar invested in a a 401(k) reduces by $1 the amount allowed to be invested tax-free in an IRA. Taxes must be paid on the money when it is withdrawn from those plans at retirement.
A successful amendment proposed by Sen. David H. Pryor (D-Ark.) would exempt tax-deferred savings plans for employes of nonprofit institutions from those limits and from penalties for early withdrawal of the funds.
*Mandatory five-year vesting in company-sponsored pension plans, rather than the current 10 years. Limits on the extent to which employers can reduce pension benefits if the retiree receives Social Security benefits.
*A requirement that firms cover a larger proportion of employes with their retirement plans. Currently, 56 percent of workers must be covered; the bill would require that 80 percent be covered unless a "fair cross section" of the work force, as specified in the bill, is covered.
In one of its liveliest and most heated sessions in this round of tax revision, the committee defeated a proposal by Sen. Spark M. Matsunaga (D-Hawaii) to wipe out most of the proposed pension changes directed at including more middle-income workers.
The 10-to-9 vote against the amendment came after Packwood angrily said: "The tax code is not to be used to let the elegant live very exquisitely in retirement."
Opponents of the federal-worker cutback have been fighting it practically since the House passed its tax bill last December. Blending the taxable and tax-free portions of pensions would not increase the total tax bill of a federal retiree, but would require that taxes be paid up to three years sooner than they would have been paid otherwise.