The Senate Finance Committee, bowing to opposition from the Reagan administration, tentatively dropped several proposals that would raise the tax bills of upper-income individuals and corporations.
The items have been taken "off the table," at least for now, from a package of measures the panel is considering to raise about $9 billion in taxes to comply with the deficit-reduction accord between President Reagan and congressional leaders.
One of the dropped proposals would have frozen the estate tax at its present top rate of 55 percent, instead of allowing the rate to drop to 50 percent next year as scheduled. Another would have extended the Medicare portion of the payroll tax to all salary income, including income above the threshold -- currently $43,800, rising to $45,000 Jan. 1 -- that is currently exempt from the 1.45 percent Medicare tax.
Treasury Secretary James A. Baker III set off a debate during the committee's closed-door session yesterday by telling members that President Reagan so strongly wants a cut in the top estate-tax rate -- which would benefit about 2,000 wealthy individuals -- that he may oppose the entire revenue package if it contains the proposal to keep the rate at 55 percent.
Sens. George J. Mitchell (D-Maine), John H. Chafee (R-R.I.) and Bill Bradley (D-N.J.) took Baker on, committee sources said. Mitchell reportedly argued that the panel shouldn't cut taxes for the wealthy at the same time as it is cutting Medicare benefits.
But Baker "forcefully presented the president's position," Sen. Max Baucus (D-Mont.) said. As a result, although some panel members may continue to push the estate-tax rate freeze, the proposal will probably die, committee sources said, because lawmakers are eager to produce a deficit-reduction package that can gain White House approval and bipartisan support on Capitol Hill.
The same fate will probably befall the proposal to impose the Medicare payroll tax on all salary income. That proposal has drawn howls of protest from conservatives, who contend that it would effectively raise the top tax rate on individuals, undercutting Reagan's drive to bring tax rates down.
Both the estate-tax and Medicare-tax provisions had been included in a bill that the panel approved earlier this year. But they were conspicuous by their absence from a list of tax hikes the panel began considering yesterday.
Many of the items on the list were in the previous bill, which never passed the full Senate. Still on the list, for example, is a proposal to extend the 3 percent excise tax on telephone bills, now scheduled to expire Jan. 1.
Sen. Lloyd Bentsen (D-Tex.), the committee chairman, indicated that the items on the list will constitute the main source of the $9 billion in tax increases that the panel is aiming to approve for fiscal 1988. "I think quite a number of these things we'll be able to accept," he said.
Bentsen cautioned, however, that the list had been drawn up by the committee's staff, and that it "is not an all-inclusive list or a final list." The dropped provisions could conceivably end up in the panel's final bill, he said.
Also among the provisions that had been approved earlier by the committee but not on yesterday's list were several proposals to end corporate tax breaks. One of the biggest of these was a proposal to repeal the so-called completed contract method of accounting, which benefits large defense contractors and construction firms.
To replace the dropped items, the list included several proposals advanced by the administration that would collectively raise $500 million in fiscal 1988. Among these was a proposal to deny the child-care credit for the cost of sending a child to overnight camp.
The Finance Committee also made considerable progress yesterday toward adopting an estimated $2 billion in savings from Medicare, as envisioned in the deficit accord. The panel tentatively decided to scale back one proposal for the government to buy orthopedic shoes for diabetic Medicare patients who suffer from circulatory problems in their feet. Conservatives had derided claims that the proposal would save $24 million by helping to prevent the need for foot amputations. The committee approved a proposal to test the cost-effectiveness of the proposal on a small sample of Medicare patients.
President Reagan, meanwhile, threatened to veto another key component of the deficit-reduction agreement if it does not include a continuation of "essential nonlethal aid" to the Nicaraguan contras.
In a letter to House Republican Leader Robert H. Michel (R-Ill.), Reagan said that it is "imperative" that an omnibus spending bill scheduled for a House vote today include further aid to the contras. But Democratic leaders ruled out any inclusion of contra aid in the legislation, and Republicans decided not to push the issue.
Staff writers Tom Kenworthy and Dale Russakoff contributed to this report.