The Congress: Hostage for Tax Reform

Congress continues to battle over extension of the $8 billion income-tax surcharge, the Government’s prime anti-inflation program. The extension bill has been blocked in the Senate by Democrats who are determined to hold it as a hostage until the Administration agrees to significant tax-reform measures. Senate Majority Leader Mike Mansfield and the members of the Democratic Policy Committee suffered a setback earlier when the Senate Finance Committee reported out the House extension bill intact. But last week they received welcome reinforcements. The help took the form of action by the potent House Ways and Means Committee on a tax package that is stronger than either the Senators or most proponents of reform had dared to hope.

Ways and Means was obviously determined to write a stringent reform law. Meeting throughout the week, the committee approved the narrowing of loopholes that now allow some wealthy individuals to escape taxation entirely. The changes would bring an additional $2 billion into the federal Treasury and lighten the burden—if only by a feather —on the middle-income taxpayers.

Depletion Cut. The key feature of the House committee’s reform plan was a slash in depletion allowances on oil and certain other extractive products. The law that is now on the books permits oil-well owners to deduct from their taxable incomes 27½% of the value that each well produces regardless of drilling or operational costs. Long deadlocked over the question of depletion cuts, the committee finally approved 18 to 7 a proposal to drop the allowance to 20%. The compromise move, which surprised even Committee Chairman Wilbur Mills, came after Louisiana’s Hale Boggs, a longtime guardian of oil-industry privileges, became convinced that there was no other realistic alternative.

Boggs, now majority whip, would like to become Speaker eventually. He realizes that the surtax is necessary and that some degree of reform is probably unavoidable. Recently, reports TIME Congressional Correspondent Neil MacNeil, Boggs met secretly in New York City with a number of oil and sulphur executives. He advised them that some reduction in the depletion allowance was necessary in order to prevent even more drastic changes in other tax regulations bearing on their industries.

At that time, Boggs had in mind a depletion figure of 22%, but he still had to negotiate with Ohio’s Charles Vanik, leader of the reform movement within the committee. Vanik wanted to make it 15%. They compromised on 20%.

Making Everyone Pay. Although the reduction of the depletion allowance and the tightening of write-off provisions that are now enjoyed by the oil industry are expected to bring in just $600 million a year in additional revenues, the psychological impact of the cuts would be great. The depletion allowances, whose whole purpose is to help offset the costs of finding and exploiting new mineral sources, are regarded by many as the most blatant example of special tax privilege for industry.

The public is also likely to favor the committee’s action. It is designed to make it impossible for wealthy individuals to avoid federal income taxes entirely through tax-free investments or special loss and deduction allowances. Heeding widespread taxpayer resentment over the disclosure that 155 persons with incomes over $200,000 paid no taxes at all in 1967, Ways and Means approved a “minimum tax” plan that would require everyone to pay taxes on at least half his income. Combining proposals put forward by both the Johnson and Nixon administrations, the plan modifies the exemptions on capital gains and municipal-bond interest and eliminates the tax shelter provided by hobby-farm losses.

The proposed minimum tax plan would, if passed, produce nearly $100 million a year in revenues. The beneficiaries of this windfall would be wage earners, who now pay a higher percentage of taxes than most millionaires. Mills said that the extra funds would probably be used to cover an increase in the standard deduction of 10% of gross adjusted income claimed primarily by lower and middle-income taxpayers.

Price of Reform. Delighted by the House committee’s action and by the probability of a House floor vote before the summer recess begins Aug. 13, Senate Democratic leaders lost no time in pressing their new advantage. Mansfield offered to extend the surtax promptly, but that would take it only to the end of November. A further extension vote by the Senate, he said, would come only after the Ways and Means reform package had made its way through both the House and Senate to the President’s desk. Republicans denounced the proposition, and Minority Leader Everett Dirksen said that he could not accept it.

He may have no choice. The Administration is firmly pledged to do whatever it can—or must—to slow down the nation’s economy. President Nixon demonstrated this commitment last week when he ordered federal spending trimmed by $3.5 billion, primarily in non-Vietnamese military programs, in order to keep the budget under the $192.9 ceiling set by Congress. Viewing the surtax as his key weapon against the inflation that in June boosted the consumer price index by six-tenths of 1%, he has made it clear that he is willing to pay a price for its extension. Nixon last year indicated opposition to changing the oil-depletion allowance, but he will probably sign any tax-reform bill passed by Congress.