The historic tax-reform bill has nearly completed its sweep through the United States Senate and could be approved as early as today. But trouble may be in store for the House-Senate conference coming up on the tax bill, where a compromise is supposed to be reached between the Senate measure and a substantially different House version passed last December.
By narrowly deciding to reject an amendment to retain the deductibility of individual retirement account (IRA) contributions for all taxpayers, the Senate positioned itself to reject any other major changes to the tax proposal on the floor. That approach is supposed to speed passage of the bill. More important, however, it is supposed to ensure that the politically popular low income-tax rates the bill proposes are not raised to pay for restoration of some deductions that are in the present tax code.
Yet the Senate has voted against changes in the bill on the floor with the expectation that they will be reconsidered in the House-Senate conference. That not only raises the possibility of a lengthy conference, but the near-certainty that the rates senators have sought to protect on the floor will be altered, perhaps significantly, in the conference.
The Senate's approach has already irritated the House's chief tax writer, Ways and Means Committee chairman Dan Rostenkowski (D) of Illinois, who maintained a diplomatic silence during the Senate's deliberations. In a letter to Sen. Alan J. Dixon (D) of Illinois, Representative Rostenkowski said that the result of the Senate decision to ``table,'' and thus kill, the IRA provision would ultimately mean a raising of the rates proposed by the Senate bill: 33 percent for businesses, 27 and 15 percent for individuals.
``It is unrealistic, in my view, to expect the conference to patch up what the Senate itself seems unwilling to face,'' Mr. Rostenkowski said.
With the IRA hurdle cleared, senators now seem willing to put a raft of major changes on hold until the conference. Nonbinding ``sense-of-the-Senate'' resolutions have become a popular way for senators to go on record as favoring an amendment to the tax bill without committing themselves to finding a way to pay for it. Thus, Wednesday's 51-to-48 vote to kill the IRA amendment came after the Senate voted, 96 to 4, for a resolution that urged conferees to adopt ``the maximum possible tax benefits'' for the retirement accounts.
Similar resolutions were being pushed by Republican leaders yesterday as replacements for costly amendments that would restore the differential in capital-gains taxes, ease the transition schedule for certain tax shelters singled out for elimination by the bill, and preserve the current deduction for sales taxes.
The resolutions have the added attraction of keeping lawmakers' options open for the longest possible period. For example, the House tax-reform bill maintains full deductibility for IRAs, while the Senate measure maintains the full deduction only for those not covered by company pension plans. Otherwise, new contributions to the IRAs are no longer deductible, although interest will continue to be tax-deferred.
If the Senate had voted to restore full IRA deductibility, the House and Senate bills would be in agreement on retirement accounts, and IRAs would be off the table during the conference. But that would narrow the opportunity for compromise. The Senate's nonbinding resolution on IRAs leaves the House and Senate bills in conflict on this point, and conferees have their hands free to forge some sort of compromise. IRAs keep one advantage
Is the IRA dead?
No. In fact, even if the changes proposed by the Senate Finance Committee go through Congress unamended, the Individual Retirement Account will still be a useful tool for retirement savings.
Right now, the IRA gives two tax breaks.
In the first, all IRA contributions, up to $2,000 a year for individuals, can be deducted from taxable income, whether or not you itemize.
It's this advantage that would be eliminated by the Finance Committee proposal, though it would be kept for workers not covered by a pension. Opponents of this change say the deduction is needed as an incentive to keep the IRA contributions coming.
The second tax break permits savings to accumulate and compound tax-free every year, so you don't pay any taxes on the interest until the money is taken out, whether at retirement or earlier.
As of now, this tax break would be untouched.