Are Bigger Tax Cuts Ahead?

Congress appears to be in no mood for election-year reforms

Early warning signals were flashing last week as Congress prepared to take up the Carter Administration's wide-ranging proposals for keeping the economy humming through the coming fiscal year. Congressional critics have begun to snipe at the President's tax program, even before they get their first formal briefing on the proposals this week from Treasury Secretary Michael Blumenthal. The package calls for $34 billion in tax cuts, reduced to $25 billion net by about $9 billion in new revenue-raising reforms. The legislators are delighted, even eager, to vote for tax reductions in this election year, but their reaction to reform is distinctly chilly.

To avoid entangling the stimulative tax cuts in a knockdown congressional fight, Carter offered a list of reforms much shorter than the one he was contemplating last fall. Among the reform measures retained in the package are the elimination of individual itemized deductions for sales and gasoline taxes; personal property levies on cars, furniture, etc., which only a few states impose, would also be made nondeductible. Other proposals call for tightening up on medical expense deductions and imposing taxes on unemployment insurance payments, now exempt, collected by individuals making $20,000 or more a year.

The President faces a particularly rough time in trying to impose reforms on business. There is little likelihood that Congress will accept the White House proposal to phase out the Domestic International Sales Corporations (DISC) program, under which companies can defer taxes on some of the profits they earn by exporting, or that it will end deferral of U.S. taxes on corporate profits earned and reinvested abroad. The legislators are against anything that might put U.S. businessmen at a disadvantage with their European and Japanese competitors. Says Republican Congressman Barber Conable of New York, a collector of Indian tomahawks who sounds as if he would like to swing one at Carter's reform proposals: "The President isn't going to win on either DISC or deferral." The President's proposal to limit deductions for business lunches to 50% of cost stirs little enthusiasm among Congressmen. One counterproposal being discussed by members of the Ways and Means Committee is to put a ceiling --say $25 per person--on the amount that businessmen can deduct for meals. Committee members agree that some tightening up is necessary, and they are likely to put an end to deductions for country club dues, yachts, theater tickets and the like, as Carter urges.

In all, Congress will probably enact no more than half the reforms asked for by the Administration. One reason: some congressional leaders do not believe the time is right for revenue-raising tax reforms. They are worried that net tax cuts of only the size that Carter proposes would be more than offset by scheduled increases in Social Security levies, plus the so-called inflation tax (inflation automatically worsens the tax bite by pushing people into higher brackets as their incomes rise). House Speaker Thomas P. O'Neill, among others, fears that the economy could begin turning down just before next fall's election. O'Neill sees Congress's job as one of enlarging and broadening the tax cuts, to make sure that the stimulus is there to keep the economy moving, and not enacting reforms. O'Neill is predicting that the final net tax cut will total close to $35 billion.

That prospect is what worries Ways and Means Chairman Al Ullman, who contends that a bigger tax cut would deepen the budget deficit, kick up inflation and irrecoverably lead to recession. He opposes even the $25 billion cut and advocates starting at a lower figure, say $15 billion. But Ullman is not likely to prevail over O'Neill. Earnest, hard-working Ullman lacks the clout wielded by his predecessor, Wilbur Mills, in part because of recent reforms of House rules, which weakened all committee chairmen while strengthening the Speaker.

Congressional reaction to the $500.2 billion budget is generally more positive. On the whole, most legislators regard it as a tight, realistic blueprint that will probably come through Congress in fairly recognizable shape. Still, there are important differences over particulars. Conservatives are worried about the budget's inflationary impact and would have preferred a smaller deficit than the $61 billion now estimated. Liberals, on the other hand, feel betrayed by Carter's refusal to allocate greater resources to fighting joblessness and urban ills and for public health. They note that Carter, who ran on a platform of reducing defense outlays, submitted a military budget calling for a 3% increase in spending, discounted for inflation, to $117.8 billion. Liberals are vowing to get a larger share of the pie for social welfare programs this year, while conservatives are equally determined to maintain the nation's military preparedness. Thus the stage is set for some ferocious floor fights in the coming months.

The most galling aspect of the week for the Administration was the continuing sour reaction of business to the President's program. As disappointed White House staffers point out, much of the budget and the tax program was especially tailored to please businessmen --but to little avail. Says one aide bitterly: "Business is acting like the kid who after opening 15 presents Christmas morning turns around and asks, 'Is that all?' "

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The Administration ran into another bit of trouble in Congress last week when the Senate Banking Committee unexpectedly delayed confirmation of G. William Miller, chief of Textron Inc., to succeed Arthur Burns as chairman of the Federal Reserve Board. The reason: to give the committee time to investigate an assertion by Chairman William Proxmire that a Textron subsidiary, Bell Helicopter, made a $2.9 million payment to an Iranian sales agency, Air Taxi, that was secretly owned by General Mohammed Khatemi, the Shah's brother-in-law and commander of the Iranian air force (he died in 1975). Miller denies that he ever heard of the general. He said he authorized the payment to compensate the agency for past services and to settle any future claims for commissions. Bell later landed a $500 million contract with Iran. Mindful of the criticism that the Senate received when it too hastily confirmed former Budget Director Bert Lance, the committee members agreed to conduct an investigation that is expected to take a week. Even so, Miller's ultimate confirmation seems assured.

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