Trying to Stage a Tax-Reform Rally

By Charles P. Alexander

Just as the Kansas City Royals were coming from far behind to win the World Series during the last weekend of October, Dan Rostenkowski, the Illinois Democrat who chairs the House Ways and Means Committee, was trying to stage a dramatic rally of his own. Only a few days before, his goal of presiding over a thorough reform of the U.S. income tax code had seemed virtually dead. But Rostenkowski called extraordinary Saturday and Sunday sessions of his committee in an attempt to breathe new life into the tax-reform effort. Though the meetings broke up at dinnertime, giving the baseball fans in the group a chance to watch the World Series, the lawmakers made enough progress over the weekend for Rostenkowski to proclaim that a tax bill would emerge from Ways , and Means within a month and be ready for full House action in December.

President Reagan may have launched the drive to cut tax rates by closing loopholes, but Rostenkowski has become the campaign's workhorse. Ever since he took over the prestigious Ways and Means post in 1981, he has been eager to mold a major tax bill. Moreover, both he and House Speaker Tip O'Neill fear that Reagan will publicly denounce them as obstructionists and win political points if tax reform dies in the Democrat-controlled House.

Up to now, both the Democrats and Republicans on the Ways and Means Committee have been reluctant to join the tax-reform crusade. Under pressure from a horde of special-interest groups that oppose many provisions of the bill, the committee members felt that Reagan and Rostenkowski were trying to railroad them into hasty action. But Rostenkowski finally got things moving last week by agreeing not to curb deductions for state and local taxes. Reagan had wanted to eliminate the deductions completely, and Rostenkowski had favored strict limits on them. These proposals provoked vehement opposition from high-tax states, including California, with its 45 Representatives, and New York, with 34.

Rostenkowski's about-face stunned his colleagues. When Representative Thomas Downey, a New York Democrat, expressed his surprise to Rostenkowski, the chairman said, "I was always going to give you state and local taxes." Replied Downey: "If you were, you deserve an Academy Award." After Rostenkowski's concession, many committee members from high-tax states felt almost obligated to support the tax-reform bill. "You look so ungrateful if you don't," said Downey.

The decision to continue permitting deductions for state and local taxes will make it difficult for the Ways and Means Committee to produce a bill that sharply reduces tax rates but does not increase the budget deficit. Ending those deductions entirely would have raised federal revenues by more than $160 billion over five years and helped pay for Reagan's plan to drop the top personal rate from 50% to 35%. With the write-offs for state and local taxes still in place, the committee will be able to reduce the top rate only to 37% or 38%. The committee also decided that it cannot afford to raise the personal exemption from $1,040 to $2,000, as Reagan had proposed. That would cost the Treasury $176.5 billion over five years. Instead, the members will probably go along with a Rostenkowski suggestion that the exemption be $1,500.

To pay for a tax cut of any size, the committee will have to tighten some loopholes without opening too many others. So far it has voted to reduce the tax breaks given to the timber industry, to investors in housing projects and to corporations that set up stock-ownership plans for employees. The committee has also agreed to drop the popular tax preference that allows individuals to exclude the first $100 of corporate dividends from their taxable income. And finally, the lawmakers have taken at least a mild swipe at the fabled three- martini lunch and corporate parties at the Super Bowl. The committee's plan would allow companies to deduct only 75% of the cost of business meals and 50% of entertainment expenses.

All the decisions are tentative, though, and many of the most sensitive votes have yet to be taken. The committee has done nothing, for example, about Reagan's proposal to tax the health-care benefits that companies give employees. Labor unions have already mobilized an army of lobbyists to fight that plan. Other thorny issues still to be resolved include the fate of the oil-depletion allowance, which is dear to Congressmen from energy-producing states, and the level of corporate taxation. Reagan has proposed to boost business taxes by reducing depreciation allowances and ending the investment tax credit. But many economists and Congressmen fear that those steps would slow the rate of investment and hurt America's competitive position in world trade.

Rostenkowski is now confident of getting the votes he needs to move the tax bill out of his committee, but winning passage by the full House will be much tougher. House Republicans have shown no enthusiasm for supporting a plan shaped by the Democrats. Jack Kemp of New York, for one, will oppose the bill if the top tax rate is 37%, which he considers much too high. Democrat Jim Jones thinks that tax reform's fate depends on the White House. Says he: "If Reagan pushes hard to pass the committee bill, it's better than fifty-fifty to get through the House. If he makes it a do-or-die situation, he'll deliver most of the Republicans."

The President does not like the way Rostenkowski is tampering with his tax plan. But White House officials seem eager to get almost any kind of bill out of the House, reasoning that it can later be changed in the Republican-led Senate. Treasury Secretary James Baker has been quietly urging House Republicans to back Rostenkowski.

No matter what the House decides to do, the Senate is not likely to consider tax reform this year. Oregon's Robert Packwood, the chairman of the Senate Finance Committee, said last week that it would be a "colossal mistake" to rush through such a complicated task. So Rostenkowski is still a long way from winning the tax-reform victory he covets. But, like the Kansas City Royals, he does not give up easily.

With reporting by Neil MacNeil/Washington