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Tax Issues May Stymie Work On a Balanced Budget Plan

By Clay Chandler
The Washington Post
WASHINGTON

Differences on tax issues may prove the largest obstacle to President Clinton's effort to reach agreement with Republicans on a deal to balance the budget.

Senate Republicans are pushing for a package of tax reductions that is twice as generous as Clinton's and would include more breaks for traditional GOP constituencies such as business and upper-income households. And they are vigorously oppose many of Clinton's proposed tax increases on corporations and investors.

The heart of the GOP plan is a proposal to cut by half the tax rate on capital gains - profit from the sale of stock, property and other assets. Clinton has said that he is not "philosophically opposed" to cutting the capital gains rate, but does not regard such a reduction as a priority.

There are some areas for potential agreement. Several of Clinton's proposed tax measures - including proposals to give a $500 tax credit to families with young children and sweeten incentives to participate in individual retirement accounts (IRAs) - are White House variations on ideas originally championed by Republicans. Others, such as Clinton's proposal to pass out credits and deductions for higher education, may prove politically difficult for Republicans to resist.

But even on items where they are in broad agreement, Clinton and the Republican leadership remain far apart on details such as effective dates, income caps and whether tax breaks should be permanent or temporary.

In combination, the differences in each side's proposals could produce widely varying effects on the tax bills of individual households, depending on taxpayers' income level and the ages of their children.

For example, a married couple with two children ages 10 and 15 and an annual household income of $35,000 would see their taxes reduced by $1,079 under the Republican plan and by $500 under the Clinton plan, according to an analysis by Deloitte & Touche, the big accounting firm. But if that same couple had children five years older and the eldest was enrolled in college, the Clinton plan would provide a $1,500 tax cut while the GOP plan would lower their taxes by $579.

Clinton's budget proposes tax cuts that would return $98 billion to middle-income families with children, college students, homeowners and senior citizens over the next five years. That total also includes estate tax relief for some small businesses and farmers, a variety of tax benefits to help inner-city businesses and deductions for businesses that offer jobs to long-term welfare recipients.

But all major components of the Clinton tax cut would be scaled back if deficits fail to decline according to projections laid out by administration forecasters.

The proposed budget also would raise taxes and some federal fees, boosting revenue by about $80 billion. Those measures would mostly affect corporations, investors and airline travelers.

The Senate Republican plan would cost the Treasury $198 billion, and is undiluted by revenue increases.

Clinton's child tax credit is more narrowly targeted than the Republican version. With a five-year cost of $46.7 billion, it would be phased in over several years and limited to families with children under the age of 13. Families with annual incomes under $60,000 would be eligible for the full benefit; those with incomes up to $75,000 per year would get a partial credit. The break would expire in 2002. Republicans, on the other hand, favor making the full $500 credit available next year, setting income caps much higher and adopting the credit permanently.

The Clinton plan contains $38.4 billion over five years in breaks for college students, including $18.6 billion in credits of up to $1,500 per household for students in the first two years of college and $17.5 billion for a tax deduction of up to $10,000 for post-secondary education and training.

Republicans favor tax breaks for education on a much smaller scale. Some of the elements of their program would restore deductibility for interest payments on college loans, establish educational savings accounts similar to tax-favored IRAs and provide new breaks for families participating in state-sponsored tuition pre-payment programs.

Senior citizens would be among the biggest beneficiaries of two other features of Clinton's tax plan. One would double existing income limits restricting participation in IRAs and allow penalty-free withdrawals for higher education, unemployment expenses and first-time home purchases. The other would allow joint filers to exclude from taxable income up to $500,000 in capital gains from the sale of their home. Republicans would completely eliminate income restrictions for participation in IRAs.