Rostenkowski Yields on Capital Gains Tax Plan : Bush-Supported Measure Up for Vote as Democrats Oppose Compromise

WASHINGTON —  House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) conceded defeat Wednesday in his effort to forge a compromise on reducing the capital gains tax, clearing the way for approval of a proposal supported by President Bush to cut the tax on investment profits over a 2 1/2-year period.

The panel is likely to vote today, lawmakers said, in favor of a measure championed by Rep. Ed Jenkins (D-Ga.) and supported by a coalition of all 13 Republicans on the committee and six Democrat members. It would reduce the tax rate on most capital gains to about 20% on a temporary basis through the end of 1991.

After a lengthy meeting with House Speaker Thomas S. Foley (D-Wash.), Rostenkowski told reporters that he would no longer block a committee vote on the Administration-supported measure.

“We’ll probably go to committee (today) and entertain the Jenkins amendment,” Rostenkowski said. Asked if the measure would win, Rostenkowski replied: “Yes.”

Opponents of the Jenkins proposal, who argue that it unfairly benefits the wealthy, conceded that it probably would prevail on the House floor.

Senate Plan for IRAs

Capital gains taxes, which are imposed on profits from the sale of stocks, real estate and other assets, are now taxed like ordinary income, usually at 28% but at a rate as high as 33% for some taxpayers. Supporters contend that a lower rate would stimulate additional investment and spur greater economic growth.

A cut in the capital gains rate is expected to produce a one-time windfall to the Treasury as investors sell stocks to take advantage of the lower rates, but it probably would reduce federal revenues over the long-term.

In the Senate, key Democrats are backing an alternative plan that would replace a capital gains tax cut with a proposal to expand tax breaks for individual retirement accounts.

Rostenkowski, who had vowed to help lead opposition to a capital gains tax cut, was faced with the threat of losing control of the tax bill if the committee did not act by the end of the week. California Rep. Leon E. Panetta (D-Carmel Valley), the House Budget Committee chairman, had pledged to bring a tax and spending measure to the House floor to ensure that Congress votes on a 1990 deficit-reduction package before the fiscal year begins Oct. 1.

To avoid serious damage to the committee’s role as the designated originator of tax legislation, Rostenkowski agreed to allow a vote on the Jenkins proposal that would exclude 30% of all capital gains from taxes through the end of 1991. After that date, the rate is supposed to return to 28% and be adjusted to avoid taxes on gains that simply reflect inflation.

Democrats Oppose Compromise

In seeking a compromise, Rostenkowski had been attempting to persuade tax writers to back a plan that would allow taxes on capital gains to be adjusted for inflation and to add further tax breaks for assets held for long periods.

Although Rostenkowski appeared to have won support from the coalition that supports the capital gains cut, most of the 23 Democrats on the committee vowed to oppose any such compromise. Rostenkowski was unwilling to desert a majority of his fellow Democrats to ram the measure through his committee.

Once he failed in that effort, Rostenkowski tried to persuade lawmakers to go along with a “bare bones” bill that would raise the minimum $5.3 billion needed to meet the goal of last April’s congressional budget agreement with the White House.

When that approach also ran aground, lawmakers said, Rostenkowski decided to accept defeat rather than lose control of the tax bill because of the stalemate.