House and Senate Republicans agreed last night on a compromise plan to cut all income tax rates by one percentage point as part of a giant tax cut they hope to tout to voters over the August recess.
The provision is part of an overall $792 billion, 10-year tax cut plan that would also eliminate the estate tax, reduce capital gains taxes, enhance IRAs, provide scores of tax breaks and credits for corporate America and defray the cost of education and health care.
About $100 billion of the cuts would provide relief from the so-called marriage penalty, by doubling the standard deduction for couples who do not itemize on their tax returns and by expanding eligibility for the lowest tax rate -- 15 percent -- for those who do. Lawmakers also agreed to extend a research and development tax credit for five years -- the principal goal of high-tech Silicon Valley companies.
"I think it represents a good bill, and it returns the money to the American people, where it should be going," said Senate Finance Committee Chairman William V. Roth (R-Del.), who jointly announced the agreement with House Ways and Means Committee Chairman Bill Archer (R-Tex.).
The final plan was thrashed out during two days of marathon talks by the leadership and the chief GOP tax writers, with Democrats excluded from the negotiations. President Clinton has vowed to veto the plan on the grounds that it would use up money needed to shore up the Medicare and Social Security programs.
Moreover, the compromise is likely to encounter resistance from moderate Republicans and centrist Democrats who backed GOP tax plans to keep the process going but who believe the final plan is still too big and tilted toward upper-income taxpayers. As details leaked out yesterday, it appeared negotiators were moving closer to the House plan, which called for an across-the-board income tax cut.
"If the bill comes back looking more like the House-passed bill, it will have serious problems passing the Senate," said Sen. John B. Breaux (La.), one of four Democrats who voted for the GOP bill.
House Speaker J. Dennis Hastert (R-Ill.) and Senate Majority Leader Trent Lott (R-Miss.) nonetheless are bent on staging a final vote on taxes this week so that their members can return home for the recess spouting a unified message of tax relief for most Americans. The Republicans intend to deny Clinton the opportunity of holding a mid-summer veto ceremony with the Republicans out of town by waiting until September to send him the actual bill.
By agreeing to a plan that would shave a percentage point off the tax rate in every bracket, negotiators have embraced an approach that enjoys strong support among House Republicans and many conservative Republicans in the Senate, including Lott.
Proponents argue that the approach is more fair and ensures that all Americans who file tax returns will benefit. The House-passed plan called for a 10 percent across-the-board reduction in rates, although those cuts would be phased in slowly, with the full effect not felt until the ninth or 10th year. The Senate-passed plan was targeted more toward lower- and middle-income taxpayers because it reduced the lowest tax rate from 15 percent to 14 percent and broadened that bracket.
The compromise would gradually cut one percentage point in each personal income tax rate. The 15 percent tax bracket would go to 14 percent, for example, and the 39.6 percent bracket would become 38.6 percent. Thus, the percentage reduction would be greater at lower incomes.
The across the board tax cut would be premised on the government's continued progress in reducing the national debt under a provision insisted upon by the House. What's more, all the provisions of the bill would expire after 10 years, under a sunset provision added to get around an obscure but potentially lethal budget rule in the Senate.
Still, Lott said prospects are dimming that Congress and Clinton can agree on a major tax package and that his party may have to consider a fallback, such as using the surplus to reduce the national debt instead.
"If I can't see a way to come to a reasonable agreement, then the alternative will be to . . . put the money in place so that the debt can be retired," Lott told reporters.
House Majority Leader Richard K. Armey (R-Tex.) agreed that debt reduction was an acceptable fallback but said he wasn't ready to give up on a compromise with Clinton.
Furious at being excluded from the talks, Rep. Charles B. Rangel (N.Y.), ranking Democrat on the Ways and Means Committee, complained: "We've been kicked out. They aren't in there to write a good tax bill but to prepare a political statement. . . . They have sequestered themselves . . . to piece together a political bill they know is going nowhere."
As negotiators rushed to put the final touches on their agreement, Silicon Valley executives kept their eye on a particularly glittering prize: the tax credit for research and development costs. High-tech lobbyists have been working feverishly for months to make the credit a permanent feature of tax law. While they didn't get that, they got the next best thing, a five-ear extension.
The credit, designed to encourage investment in research, dates to 1981, but it has generally been approved one year at a time, and it recently lapsed almost a year. The issue has sparked what some lobbyists call a "bidding war" between Democrats and Republicans anxious to court the research community.
"We're in the thick of it like everyone else," said Michael Engelhardt, chief operating officer of TechNet, a Palo Alto, Calif., political action committee representing 130 chief executives.
TechNet raised $3 million to $4 million for members of Congress in the last campaign and has held dozens of fund-raisers this year, including one for Roth. It has deployed scores of chief executives to call congressional offices and enlisted the services of several well-connected lobbyists, including Ed Gillespie, a former aide to Armey, and Tony Podesta, brother of White House Chief of Staff John Podesta and head of the lobbying firm Podesta.com.
Silicon Valley's drive to preserve and extend the research and development credit is one small part of the intense maneuvering by dozens of business groups seeking to hold onto billions of dollars in breaks in the huge tax reduction bills that have passed the House and Senate.
Businesses failed to get a cut in the corporate capital gains tax. But the Republicans agreed to cut the personal capital gains tax rate, from 10 percent to 8 percent among lower-income individuals and from 20 percent to 18 percent among higher-income taxpayers, with an annual adjustment in rates to discount the effects of inflation. The estate tax would be eliminated gradually.
Staff writers Helen Dewar and Juliet Eilperin contributed to this report.