Senate Defeats Social Security Payroll Tax Cut : Legislation: The 60-38 vote crosses party lines and effectively kills the measure. The protection of the trust fund is seen as lawmakers’ chief concern.

WASHINGTON —  Heeding calls to protect the Social Security trust fund, the Senate on Wednesday decisively rejected a politically appealing plan to cut the payroll tax on workers and employers by a full percentage point over the next five years.

The 60-38 vote, which effectively kills the proposal for this session of Congress, represents a victory for President Bush and a setback for Senate Majority Leader George J. Mitchell (D-Me.), a chief advocate of the Social Security tax reduction.

The proposal by Sen. Daniel Patrick Moynihan (D-N.Y.) was advocated as a way to make the tax code more progressive by providing a tax break for working men and women who bear most of the payroll tax burden. But many lawmakers were alarmed by its fiscal impact.

“Under pessimistic economic assumptions, adoption of this legislation could again threaten to bankrupt the Social Security system,” Bush wrote in a letter to Senate Minority Leader Bob Dole (R-Kan.), setting the theme for the two-day debate.

A strong bipartisan majority of 34 Republicans and 26 Democrats defeated the effort to lower the retirement tax to 5.2% from 6.2%. The plan was supported by 29 Democrats and nine Republicans. Both California senators--Democrat Alan Cranston and Republican John Seymour--voted for the proposal.

It was a sharp turnaround from last October, when Moynihan got 54 votes in the Senate to keep his plan alive. At that time, however, he needed the votes of 60 senators to prevent opponents from killing the proposal.

The outcome also underscored the new reluctance in Congress since last year’s deficit-reduction agreement to reduce taxes without finding a way to offset the lost revenue.

In a related development, House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) also took an unusually hard line against almost any new tax legislation.

“I don’t think we’re going to consider a major tax bill this year,” he told a conference on tax law.

Even such popular proposals as the renewal of tax breaks for business research and development or mortgage revenue bonds, he said, would have to be offset by measures to raise $22 billion over the next five years.

“It’s a big red number that has to be matched by a big black number,” Rostenkowski said of the estimated revenue loss.

Rostenkowski noted, however, that he favors a proposed 5-cent-a-gallon increase in the federal gasoline tax to provide additional funds for building roads and reducing the deficit.

During the Senate debate, Moynihan argued that the Social Security surplus would be large enough to finance retirement benefits and allow a phased-in $200-billion reduction in payroll taxes over five years without jeopardizing the soundness of the trust fund.

The President and other opponents, however, carried the day with warnings that it would be better to err on the side of caution by not tampering with the current tax rates now that the fund has started to show a surplus after the Social Security financing crisis of 1983.

“This amendment would bring social insecurity,” Dole argued.

Moynihan and Mitchell, however, denied that the tax reduction would affect the integrity of the trust fund and said that it would help reverse a tilt in the federal tax system that now benefits the wealthy.

“Social Security taxes are higher today than necessary to fund current benefits,” Mitchell contended. “The only reason for these higher taxes is to delay for a few years in the next century the point at which taxes ultimately will have to be raised.”

Mitchell’s prestige was on the line partly because he and others on the Democratic policy committee had endorsed a Social Security payroll tax cut as a key item in the party’s Senate agenda this year.

But Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, bucked his party’s leadership and joined with Sen. Pete V. Domenici (R-N.M.), ranking Republican on the Senate Budget Committee, to oppose the concept.

“If this (Moynihan) amendment is passed, the Senate will have laid the groundwork for a reduction in the Social Security trust fund reserves that I believe will seriously undermine the faith of the American public in the system,” Bentsen said.

“This payroll tax cut may provide a slight stimulus in the short term, but the long-term effects are unequivocally harmful to the American economy,” Bentsen said. “Any short-term stimulus will be quickly overwhelmed by the stronger forces of falling savings, rising interest rates and declining investment put in motion by deeper deficits.”

After his defeat by a larger-than-expected margin, Moynihan said that other senators’ concern over the adequacy of Social Security reserves was the decisive issue. He also acknowledged that his tax-cutting plan, which created wide interest when he first introduced it last year, is now dead.

After the vote on the Moynihan plan, the Senate without dissent adopted a provision requiring a majority of 60 votes--instead of the standard 51-vote majority--to make any changes in taxes or benefits affecting the Social Security trust fund.