The budget agreement unveiled in the Rose Garden yesterday would pinch virtually every American pocketbook by raising taxes on gasoline, booze, cigarettes, boats and furs while shaving benefits paid out to farmers and Medicare recipients.
Even the wealthy get nicked, albeit not as much as some Democrats had hoped. Although the package does not include an increase in the top income tax rate, a complex formula for reducing deductions for people who earn more than $100,000 would have an effect similar to raising their income tax rates by about one percentage point.
President Bush said the deal "requires that virtually everyone contribute in some way."
"This will be seen as sufficient pain from the standpoint of burden sharing," House Speaker Thomas S. Foley (D-Wash.) said yesterday on ABC's "This Week With David Brinkley."
"There will be some taxes raised and we hope that they will go across the income spectrum of the United States, so that there is a fair share of burden sharing except for the lowest income elements," Foley said.
The heavy reliance on excise taxes to close the budget gap is expected to draw criticism from many who feel the package hits lower- and middle-income earners too heavily.
Such taxes are paid by people regardless of income. However, the negotiators tried to target excise taxes at activities they specifically wanted to reduce, such as oil consumption, cigarette smoking and excessive alcohol use.
To make the package more progressive, they increased the earned income tax credit for couples with incomes of less than $19,340.
Leaving the White House yesterday, Senate Majority Leader George J. Mitchell (D-Maine) still expressed "disappointment that the tax burden is not as fairly shared as I would have preferred. . . . That is one aspect that we have compromised."
If the accord is enacted into law, the biggest impact on individuals probably would be interest rates lower than they would have been otherwise, helping to keep down business expenses and mortgage payments for the nearly two-thirds of Americans who own their homes.
But the most immediate and most obvious cost would be higher taxes on gasoline, which would boost prices at the pump by a nickel Dec. 1 and by another five cents next July. The increased gasoline tax is the biggest component of the tax package agreed to by the White House and congressional leaders. Gasoline also would go up Jan. 1 because of a separate 2-cent-a-gallon tax on oil products, except for heating oil.
Edwin Rothschild, director of Citizen Action, said the gasoline tax would cost the average household $120 a year, in addition to the $250 a year in price increases following the Iraqi invasion of Kuwait. This would particularly hurt people in rural areas and western states.
The accord also would hit the 33.3 million elderly and disabled Americans who are recipients of Medicare payments. The government expects to raise $13 billion by increasing to $73,000 the amount of income subject to the 1.45 percent Medicare tax, which now phases out at $51,300 along with the rest of the 7.65 percent payroll tax that goes to Social Security.
The agreement would cut anticipated Medicare spending by $59.9 billion. Half that would come from reduced reimbursements to hospitals and doctors. The other half would come by increasing from $75 to $150 the amount beneficiaries must pay before receiving benefits and by raising the premiums so that they cover 30 percent of the cost of the program, up from 25 percent today. To offset that, lawmakers provided aid to poor elderly Medicare recipients.
Lawmakers have avoided touching the Social Security program, but the change in Medicare premiums and deductibles would affect a similarly vocal constituency and could prompt an outcry.
There are two measures designed to increase the burden on wealthier taxpayers. One is a 10 percent luxury tax on the amount that the purchase price of new private boats and yachts exceeds $100,000, on automobile prices above $30,000 and jewelry and fur prices that exceed $5,000. Thus the surtax would apply to $20,000 of the purchase price for a $50,000 car.
The other is a limit on tax deductions. The measure would disallow deductions equal to 3 percent of a person's or a couple's income in excess of $100,000. For an individual earning $160,000 with deductions of $40,000, the measure would take away $1,800 worth of deductions. This measure would affect the estimated 4.25 million returns of Americans who have over $100,000 in income and who itemize their deductions.
Few people are expected to toast the package, especially because of a doubling of the tax on a six-pack of beer from 16 cents to 32 cents, a jump in the tax on a 750-milliliter bottle of wine from 3 cents to 25 cents, and a boost in the tax on distilled spirits from $12.50 per proof gallon to $14.
In the name of spurring economic growth, however, the package would give tax breaks to businesses, especially those in the oil and gas industry. It would give $4 billion worth of tax credits for new exploration and production, tax incentives for the development of oil that is difficult to extract because it is located in so-called tight sands and a limited exemption to the minimum tax for oil and gas producers.
"This package is aimed at producers," said Sen. Phil Gramm (R-Tex.).
The accord also extends tax credits to firms for research and development and increases the credit from 20 to 30 percent of the expenditure. It adds tax incentives for buying scientific equipment.
The deal also helps out relatively small companies and their investors by giving a 25 percent deduction for up to $50,000 worth of stock purchases in relatively small, high-growth companies. This measure alone would cost $7.3 billion over the life of the five-year budget accord.
Staff writer John E. Yang contributed to this report.
Following are highlights of the five-year, $500 billion deficit-reduction agreement between the White House and congressional leaders. TAXES
Taxes would be increased by $133.8 billion over five years, including:
$45 billion from raising the federal gasoline tax from 9 cents a gallon to 14 cents Dec. 1 and to 19 cents July 1, 1991.
$18 billion from reducing federal deductions for taxpayers with adjusted gross incomes exceeding $100,000.
$13 billion from raising the amount of income subject to the 1.45 percent Medicare tax from $51,300 to $73,000.
$11.8 billion from a 2-cent-per-gallon petroleum tax that would exclude home heating oil.
$10 billion from raising federal excise taxes on alcoholic beverages, doubling the tax on a six-pack of beer from 16 cents to 32 cents, raising the tax on a 750-milliliter bottle of table wine from 3 cents to 25 cents and raising the tax on distilled spirits from $12.50 per proof gallon to $14.
$5.9 billion from increasing the federal excise tax on cigarettes from 16 cents a pack to 20 cents next year and 24 cents in 1993.
$1.9 billion from a 10 percent tax on the amount that the purchase price exceeds $100,000 for new private boats and yachts, $30,000 for automobiles and $5,000 for jewelry and furs. DOMESTIC SPENDING CUTS
Benefit programs would be trimmed $104.8 billion over five years, including:
$59.9 billion from Medicare, roughly half from health care providers and about half from beneficiaries.
$14.2 billion in user fees, including $4.04 billion from increased bank insurance charges.
$13 billion from reductions in agriculture programs.
$8.1 billion from the elimination of the lump-sum civil service retirement option.
$3.2 billion by delaying payment of unemployment benefits for two weeks.
$2 billion from reforms of the student loan program.
$1.6 billion from changes in government purchases of pharmaceuticals. MILITARY SPENDING CUTS
For the first three years: $67.2 billion reduction in outlays.