Republican Party split in Washington's tax cut debate

WASHINGTON -- Tax cuts, long the unifying mantra of Republicans, now threaten to split party ranks, setting social conservatives against the business community and Wall Street.

The debate, being fought in the halls of the U.S. Capitol, pits social conservatives seeking a $500 per child tax credit against the business community that wants a capital gains and estate tax reduction, along with expanded tax credits for Individual Retirement Accounts.

The congressional tax-writing committees must soon decide who will get the biggest piece of the $135 billion tax-cut pie. With about $35 billion earmarked for President Bill Clinton's education tax proposals, there's just not enough money to satisfy both factions. "I see a real struggle developing within the Republican Party on these tax cuts,'" said John Tottie, chief economist with Citizens for a Sound Economy, a business-oriented trade group. "People are going to be disappointed, it's just a question of who and just how disappointed." The debate will come to a head within the next two weeks as the House Ways and Means Committee writes and releases its tax bill, and the Senate Finance Committee follows suit shortly thereafter. Ways and Means, which by law goes first, is expected to release Chairman Bill Archer's proposals within the next week, with committee debate beginning shortly thereafter, according to committee spokesman Scott Brenner. That leaves the next 10 days for the myriad of business, social and consumer groups with a potential stake in the bill to make their case to the tax-writing staff and Republican and Democratic lawmakers. Already, the lobbying is well afoot. "It's going to be a pretty heated negotiation to see what all they cram in there," said Mark Isakowitz, chief House lobbyist for the National Federation of Independent Business, which is lobbying for a reduction in estate taxes. Of paramount importance to Wall Street is a capital gains tax reduction, and according to lobbyists and hill staff members, a reduction will certainly be part of any tax bill. The question, though, is how much of a tax cut will survive. Currently, most lobbyists say they expect the committee to include a reduction in the rate individuals pay for gains in capital assets such as stocks, bonds and real estate. A similar reduction for corporations is not expected, they say. "I don't think there's as much sympathy for a corporate capital gains tax cut as one for individuals," said Evan Liddiard, a tax analyst with the accounting firm of KPMG Peat Marwick in Washington. The second question facing the committee is the size of the reduction. As originally proposed by Republicans, investors could exempt half their investment profits from the capital gains tax. That would lower the tax rate for individuals in the highest tax bracket -- 39.6 percent -- from 28 percent to 19.8 percent, and the popularity of that cut leads many to expect the tax writing committees to seek that level of cuts. "They want to keep a pretty meaningful rate reduction in there," said Mark Weinberger, a tax lobbyist with the law firm Washington Counsel PC. The problem is, reducing the rate to that level would cost $25 billion over five years, according to estimates by the Joint Committee on Taxation. In order to reduce the size of the capital gains tax cut, the committee is examining several proposals, lobbyists say. Those include a proposal, first introduced by Democratic Senator Wendell Ford of Kentucky. His proposal would increase the capital gains deduction the longer the assets were held. For example, a stock held for one year would be taxed at 28 percent, two years at 26 percent, down to 14 percent for assets held for eight years. "I'm sure they're looking at it because it's an alternative that saves money," Liddiard said. Another idea under consideration, lobbyists say, would be to exclude real estate depreciation from any capital gains. So, for example, a homeowner who paid $100,000 for his house, then sold it for $125,000 after the house had depreciated in value to $75,000, would only be able to claim $25,000 in capital gains. Both these ideas -- and others -- have significant political opposition. The real estate industry, for example, adamantly opposes excluding depreciation from capital gains calculation. "These are both under consideration, but I don't know which way they'd go given the political opposition," Liddiard said. House Ways and Means Committee Chairman Bill Archer, a Republican from Texas, is a strong advocate of indexing capital gains for inflation, so that is also likely to get consideration. The cost, however, is certain to be a problem. The largest chunk of the $100 billion in tax cuts the Republicans have will most likely go to providing some form of child tax credit -- nicknamed the "kiddie credit" -- though efforts are underway to limit the size and cost of this reduction. The Republican proposal introduced earlier this year would provide a $500 per child tax credit to all families making under $110,000, for each child under 18. That plan, however, is estimated by Joint Tax to cost $109 billion over five years -- far more than Republicans can allot for it. Problem is, this tax cut is supported by the politically powerful social conservatives, including groups such as the Christian Coalition and the Family Research Council, long powerhouses within the GOP. "We're very much in the belief that while it's important to invest in physical capital, it's more important to invest in human capital," said Marty Dannenfelser, FRC's director of government relations. " We consider children to be our greatest resource." One proposal being discussed is a plan first proposed by Sen. Joseph Lieberman of Connecticut. That plan would, instead of providing a $500 tax credit, would allow individuals to choose either a $250 tax credit immediately or take a $500 credit that is placed in an IRA-type account that could earn interest tax-free and then be used for a child's future education cost. Some Republicans lean towards this because it could be counted against Clinton's $35 billion in education tax cuts, rather the remaining pool of money. The tax credit's cost could also be limited by imposing stricter income limits and reducing the eligible age limits. President Clinton's proposal would limit it to couples with incomes less than $50,000 and for children under 13. That proposal was estimated to cost $46 billion for five years. Still, conservative groups said they would oppose efforts to reduce the age and income limits, or direct the tax cuts to education funds, Dannenfelser said. Republicans will also include provisions to increase the estate tax credit. Currently, an individual's assets under $600,000 are exempt from estate taxes when he or she dies. The Republican plan would increase that limit. Currently, estates are taxed at a top rate of 37 percent on assets over $600,000, with that rate rising to 55 percent for $3 million estates. Boosting the limit for exempt assets to $1 million and including exclusions for certain farms and small businesses would cost $18.6 billion, according to Joint Tax. This tax, too, has its strong proponents, including the small business community. "The death tax piece is a nice fusion between what family groups want and what business groups want," NFIB's Isakowitz said."Nothing's more pro-business than trying to eat away a tax that's confiscatory on business." At the end of the day, the tax bills will be presented to the committees, debated, passed and sent to the floor of the House and the Senate, where their fate will rest on the ability of the committee's to craft a package that -- while not including everyone's requests -- goes far enough to satisfy a majority of lawmakers and President Clinton. "They can't do everything they want to do," said Stan Collender, director of the federal budget consulting group at Burson- Marsteller. "It's time to create some priorities."

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