Tax Cut Likely Would Be Retroactive to May 7

WASHINGTON —  The chairmen of Congress’ tax-writing committees said Wednesday that they plan to propose making changes in capital gains tax rates passed by Congress this year retroactive to apply to all transactions on or after May 7.

Rep. Bill Archer (R-Texas) and Sen. William Roth (R-Del.) waited until after the stock market closed to issue their two-sentence statement.

Analysts said the announcement ensures that market activity is not frozen by investors waiting to see whether their transactions will be taxed at a lower rate.

All other details on any changes in capital gains tax rates remain to be worked out, Archer and Roth said in their statement.

“Interested parties should be advised that no specific provisions have been agreed upon and will only be finalized at the end of the legislative process,” they said.

Archer is chairman of the House Ways and Means Committee, Roth of the Senate Finance Committee. The two panels have jurisdiction over the tax-cut legislation envisioned in the balanced budget deal reached last week between President Clinton and congressional Republicans.

That broad agreement calls for $135 billion in tax reductions during the first five years, to be partially offset by $50 billion in revenue increases. Over 10 years, the net tax savings would total $250 billion.

While any effective date still must be written into any legislation that is signed into law by Clinton, analysts said they expected no dispute over May 7, now that investors have been put on notice.

Lawmakers and the president could still fail to reach agreement on a capital gains cut, but analysts said at least investors now know that if they sell their holdings, the worst that could happen is that they would be taxed at no more than the maximum 28% rate in current law.

“It is really necessary to backdate any changes in capital gains because you don’t want market activity to come to a stop,” said David Wyss, chief financial economist at DRI-McGraw Hill Inc.

On Friday, Clinton and GOP leaders announced a deal designed to produce the first balanced budget in three decades. Negotiators, however, reached agreement only on the broad outlines of the spending and tax package. Discussions this week have focused on a variety of issues, including the wording of a letter the administration has demanded from GOP leaders assuring that tax cuts will not push the budget out of balance after 2002.

On the tax side, Clinton and GOP leaders agreed to provide relief in five areas--capital gains, a child tax credit, education expenses, estate taxes and individual retirement accounts.

Since that announcement, brokerage firms reported a surge in calls by investors with many of the questions focusing on just what type of reduction would occur in capital gains, the profits from the sale of stock, property or other investments.

“We’ve had more interest in this reform than anything I can remember in terms of tax reform,” said Kevin Flatley of BankBoston.

While the exact capital-gains reduction hasn’t been spelled out, several bills enjoying bipartisan support propose cutting the maximum 28% rate to about 19%, with a comparable reduction in the 15% rate. Under that scenario, someone seeking to cash out a $10,000 gain on stock holdings might save $900 on taxes.