The Republican-controlled House yesterday narrowly approved the largest tax cut since the Reagan era, a $792 billion package that would reduce income taxes by 10 percent over the next decade if Congress makes continued progress in reducing the national debt.
The massive tax package, the centerpiece of the GOP's congressional agenda, would ease the so-called marriage tax penalty, phase out the estate tax, encourage savings and offer generous deductions to defray health care and education costs. While the Republicans highlighted the benefits for families, corporate America would also benefit from a capital gains tax cut and targeted relief for industry and agriculture.
Although the House-passed plan and another GOP plan pending in the Senate have no chance of being enacted because of staunch opposition from the White House and congressional Democrats, they provide a starting point for future negotiations with President Clinton over a comprehensive package of tax relief and Medicare and Social Security reforms.
At issue is how to divide up anticipated budget surpluses of as much as $3 trillion over the next decade. Both Republicans and Democrats agree that much of this money should be used to shore up Social Security. But GOP lawmakers say there will be enough left over for their major tax cut, while Democrats say tax cuts should be limited until it's clear there is money to safeguard Social Security, Medicare and other domestic programs.
While Clinton has said the country cannot afford tax cuts of more than $250 billion, some Republican leaders and aides say they could foresee a compromise of $500 billion to $550 billion over 10 years under the right circumstances.
"All American taxpayers created this surplus and it's only fair to return it to those who sent it here," House Ways and Means Committee Chairman Bill Archer (R-Tex.) said at a GOP rally after the vote.
But Democrats charged that the Republicans were pursuing a reckless course, premised on questionable long-term economic forecasts, that could lead to a return of budget deficits. "Why in God's name would we risk this tremendous [economic] achievement and risk keeping it going?" House Minority Leader Richard A. Gephardt (D-Mo.) asked during debate yesterday.
During a town hall meeting in Lansing, Mich., Clinton renewed his vow to veto the GOP tax bill if it reaches his desk. "It will not do anything to add to the life of Social Security and Medicare," he said. "It will require huge cuts in our other investments."
With House Speaker J. Dennis Hastert's prestige on the line, GOP leaders overcame resistance from moderates who worried about the overall cost and from conservatives who thought the plan wasn't big enough. After several hours of debate, they rammed through the bill, 223 to 208, on a largely party-line vote.
More than a dozen GOP moderates had threatened to bolt unless the plan were scaled back, but in the end only four voted no -- Reps. Michael N. Castle (Del.), Greg Ganske (Iowa), Constance A. Morella (Md.) and Jack Quinn (N.Y.). At the same time, six Democrats broke ranks to support the plan. Other than Morella and Virgil H. Goode (D-Va.), all Maryland and Virginia members voted with their party.
Hastert (R-Ill.) and House Majority Whip Tom DeLay (R-Tex.) waged an intense lobbying effort to overcome moderate resistance and as part of a compromise agreed to scale back their original tax-cut plan from $864 billion to $792 billion -- the same size as the Senate GOP proposal. Last-minute reworking of the bill Wednesday night, including leadership agreement to condition the across-the-board tax cut to progress in reducing the debt, was enough to defuse the moderates' uprising.
Throughout their discussions with House leaders, GOP moderate leaders such as Castle and Fred Upton (Mich.) had voiced concern that the large tax cut would consume too much of future surpluses and frustrate efforts to bring down the $5.5 trillion national debt.
After batting around several ideas Wednesday night and yesterday, Republicans agreed on a scheme that would delay an installment of the tax cut in any year that the government's interest payment on the debt goes up.
Robert D. Reischauer, a budget expert and former CBO director, said yesterday that the compromise measure "appears to provide some modest safety valve, but I wouldn't bet a nickel on its effectiveness."
Democrats charged that the moderates were rolled by the leadership and got little out of their compromise. They noted that the so-called tax "speed bump" would apply only to the broad-based tax cut -- which benefits middle- and lower-income Americans -- but have no effect on the measures that would benefit businesses and upper-income Americans.
"What about capital gains? What about the estate tax? What about the corporate alternative minimum tax?" Gephardt asked during the debate, his voice laced with sarcasm. "That's not conditioned. Oh, we wouldn't want to hurt the people at the top."
Rep. Thomas M. Davis III (Va.), a member of the GOP leadership, played down concerns about shortcomings of the debt provisions, saying they were devised simply to break the impasse.
While the price tag of the House-passed bill matches that of the GOP plan reported out by the Senate Finance Committee, there are substantial differences in the details that would have to be reconciled once the Senate approves its own version, possibly as early as next week.
The Senate plan would drop the lowest income tax bracket to 14 percent from 15 percent, rather than offering an across-the-board rate cut, and it permanently extends the tax credits to businesses for research and development. The Senate plan would not cut the capital gains tax rate, as the House plan would, but it would eliminate the marriage penalty while the House provides only partial relief.
House GOP leaders promised conservative lawmakers and pro-family groups that they would support substantially more marriage tax relief in conference. The Senate bill also would extend the District's first-time home-buyer credit through the end of fiscal 2001.
House Republicans apparently will find a strong ally in Senate Majority Leader Trent Lott (R-Miss.). Lott said yesterday he likes the across-the-board rate cuts better than the Senate version, as well as the House version of estate tax relief. He said he will press to include some form of capital gains tax relief.
Staff writer Dan Morgan contributed to this report.
Comparing the Plans
Highlights of the main GOP tax relief packages approved yesterday by the House and pending in the Senate.
House: Across-the-board 10 percent cut in income tax rates, phased in over 10 years. After 2001, annual cuts would kick in only if interest on the national debt drops.
Senate: Reduce tax rate on bottom bracket from 15 percent to 14 percent.
Alternative minimum tax
H: Ensure that personal credits do not cause middle-class people to become subject to the tax and gradually repeal the AMT over 10 years.
S: Make permanent exemptions for personal credits so they do not apply to the AMT.
H: Pre-tax amount that could be set aside in education savings accounts, formerly education IRAs, would increase from $500 to $2,000 annually.
S: Allow pre-paid tuition programs for private colleges. Taxes could be deferred on interest earned.
H: Phase down and eventually repeal tax on inheritances.
S: Raise exemption to $1.5 million beginning in 2007 and repeal rates above 50 percent.
H: Allow self-employed to deduct 100 percent of health care and long-term care insurance expenses beginning in 2001.
S: Similar to House bill, but deductions for health insurance premiums not paid by employers would be phased in through 2006.
H: Allow married couples to claim a standard deduction of $8,600, replacing current $7,200 deduction.
S: Allow married couples to file returns as singles in a combined form.
H: Increase contribution limits to some employee benefit plans and reduce time for vesting in some pensions from five years to three years.
S: Raise contribution limits for individual retirement accounts from $2,000 to $5,000 and gradually raise income limits for contributors. Many smaller changes.
H: Cut top tax rate for most investments held at least a year from 20 percent to 15 percent.
S: No provision.
SOURCES: Congressional Quarterly, Associated Press
CAPTION: House GOP leaders savor tax-cut victory. From left are Reps. Richard K. Armey (Tex.), Bill Archer (Tex.), Bill Thomas (Calif.), and Tom DeLay (Tex.).