Senate Panel Blocks GOP Capital-Gains Tax Cut : Bentsen Plan to Expand IRAs Wins Committee’s Approval; Floor Fight Vowed

WASHINGTON —  The Senate Finance Committee rebuffed a Republican proposal to cut the capital gains tax rate early today, but advocates vowed to continue the fight on the Senate floor.

The panel, which continued to work on its own version of the tax bill backed by the House last week, adopted an alternative proposed by Chairman Lloyd Bentsen (D-Tex.) that would expand tax deductions for individual retirement accounts.

The vote on the capital gains tax cut was a 10-10 tie, with only one Democrat, Sen. David L. Boren of Oklahoma, joining a solid phalanx of nine Republicans on the 20-member tax-writing panel.

“We’re going to have the playoffs on the Senate floor,” said Senate Republican leader Bob Dole of Kansas, a member of the Finance Committee. “That’s where the action is.”

Social Security Change

The committee also approved a significant increase in the amount of outside earnings Social Security recipients from age 65 to 69 can earn without losing benefits.

The new help for seniors, expected to cost about $1 billion in revenues annually, would be financed by boosting the ceiling on income subject to Social Security taxes, currently $48,000, by about $900 next year.

Under Bentsen’s proposal, taxpayers who lost the deductions for IRAs in the sweeping 1986 tax revision would be eligible for a 50% tax deduction on contributions up to $2,000.

The plan would benefit families with income above $45,000 and unmarried individuals with income above $30,000.

Removes Penalties

Bentsen’s plan also calls for removing the 10% penalty on early withdrawals if the money is used to finance the purchase of a first home or pay college expenses for a family member.

The expanded IRA deductions proposed by Bentsen would affect 1991 tax returns filed in 1992, but the penalty-free early withdrawals could begin as early as January, 1990.

The capital gains tax-cut plan was presented by Sen. Bob Packwood of Oregon, the committee’s senior Republican. Bentsen beat back Packwood’s efforts to lure another Democrat, Sen. David Pryor of Arkansas, to the capital gains camp by salting his own plan with several provisions beneficial to timber interests that are particularly strong in Pryor’s home state.

Under the Packwood plan, which many of the Republicans praised as superior to the House tax bill, individuals would be able to exclude 5% of the profit on investments in stocks, real estate and most other assets that were held at least one year. The exclusion would gradually increase by five percentage points for each additional year an asset was held to a maximum 30% rate cut for assets held more than six years.

The defeated plan, which has an effective date starting Oct. 1, would also not tax investment profits that resulted from future inflation. Packwood also included in his plan a provision that would allow individuals to set up a new form of IRA that allows tax-free withdrawals from retirement accounts but would not provide an up-front deduction for contributions.

The full House has already voted to accept a 30% exclusion that would set an effective top capital gains rate of 19.6%, but the top rate under that plan would rise to 28% in 1992.

Last week, the House rejected a Democratic plan that would have boosted taxes on the wealthy along with an expansion of IRAs. The Bentsen IRA proposal does not include an income tax hike.

Supporters of a capital gains tax cut now face an uphill struggle in the Senate, where Democratic leaders who oppose the measure are maneuvering to require any capital gains measure to win 60 votes instead of a simple majority of 51.

The defeat in committee represents a setback for President Bush, but it is still possible that the Administration could win a showdown on the Senate floor.

Although Democrats hold a 55-45 edge in the Senate, about 10 to 15 Democrats, including assistant leader Alan Cranston of California, have expressed support for some type of cut in capital gains taxes.

If Bentsen can succeed in beating back a capital gains tax cut in the Senate after House Democratic leaders failed, it would boost his stature among Democrats and enhance Bentsen’s undeclared effort to run for President in 1992.

Any differences in the tax bills that ultimately emerge from the Senate and the House would have to be settled by a conference committee. There is still a good chance that Congress could end up ultimately approving both an expansion in IRAs and a capital gains tax cut. But it now appears the final version is likely to be significantly different from the House bill.

Before turning to tax matters, the committee approved a series of modest spending cuts, including new limits on Medicare, designed to reduce the budget deficit by $2.8 billion for the fiscal year that began Oct. 1.

The Senate Finance tax bill would boost revenues by $7.2 billion through a variety of relatively obscure measures, most of which are similar to provisions in the House bill.

It would lose slightly more than $1.6 billion by making permanent several current business tax credits, including one for corporate research and development activity, and by extending other tax credits for two years, including those for employer-provided education. The plan also would reduce revenues $154 million by repealing so-called Section 89, which forbids companies from offering substantially more generous fringe-benefit packages to their principal employees than to rank-and-file workers.

The change in the Social Security earnings limitation, which the panel had tentatively approved Monday, would benefit only retirees between ages 65 and 69 who earn more than $8,880 a year.

The committee agreed to boost the limit to $11,700 next year and then to $14,520. On the next $5,000 of earnings--to a total of $19,520--the Social Security recipient would give up $1 in benefits for each $4 earned. Once earnings pass $19,520, the penalty would be $1 for each $3 earned above the limit.

Present law requires a retiree between the ages of 65 and 69 to give up $1 in Social Security for each $2 earned above the $8,880 earnings limit.