Senators back IRA tax break Rostenkowski, White House irked

March 13, 1991|By Peter Osterlund | Peter Osterlund,Washington Bureau of The Sun

WASHINGTON -- Nearly three-quarters of the Senate closed ranks yesterday behind a bill to restore a once-universal tax break for individual retirement account contributions, signaling the start of a furious election-year contest for the sympathies and votes of middle-income workers.

"It could be the silver bullet that can get this economy moving again," said Senate Finance Committee Chairman Lloyd Bentsen, D-Texas, who announced that he and 72 other senators supported the proposal. "There's a crying need for savings in this country, and the IRA may be just the ticket to get people saving."

The plan drew immediate fire from the White House and from Mr. Bentsen's counterpart in the House, Representative Dan Rostenkowski, D-Ill., chairman of the tax-writing Ways and Means Committee.

Mr. Rostenkowski objected to the plan on the grounds that well-off wage earners would benefit from the tax break as much as the less affluent. Administration officials, meanwhile, argued that restoring tax-exempt status for IRAs would deprive the federal government of needed revenues without stimulating new savings.

Nevertheless, the idea appeared to be catching fire on Capitol Hill. Members of Mr. Rostenkowski's panel were introducing a similar measure in the House, where its popularity appears to be spreading.

The 73 senators who are committed to broadening the tax shelter would constitute a veto-proof majority in the Senate.

But it is unlikely that President Bush would veto such a bill if it passed. The White House continues its quixotic quest for a cut in the capital gains tax rate, a measure it says would stimulate investment and help taxpayers of almost every economic stripe. Administration strategists concede that they are unlikely to win Congress' assent for a capital gains reduction and, thus, would not be eager to kick off a presidential campaign cycle by opposing an IRA tax break.

Mr. Bush has already advanced a new IRA plan of his own that would generate tax-free interest and allow workers penalty-free withdrawals for emergencies. But the emerging congressional plan would go further, enabling all taxpayers, regardless of income, to make a tax-deductible contribution to their IRAs of up to $2,000 a year.

Alternatively, wage earners could contribute to a new type of IRA that, while not providing them an immediate deduction, would generate tax-empt interest if held for at least five years. Workers would be given the option of splitting their $2,000 contribution between the two.

Additionally, the bill would allow penalty-free withdrawals from an IRA to make the down payment on a first home, to pay catastrophic medical expenses or to finance a college education.

"It's important because it addresses the two most important issues in America today: the need to strengthen and support our families, and the need to build a strong national economy that is second to none," said Sen. William V. Roth Jr., R-Del.

From 1982 through 1986, all workers were permitted to make tax-deductible IRA contributions. In 1986, 16.2 million couples and individuals claimed IRA deductions exceeding $38 billion, and roughly 36 percent of the tax saving went to people with incomes exceeding $50,000.

After the 1986 tax overhaul, which restricted IRA deductions to lower-income workers and higher-income individuals not covered by a company pension, contributions plummeted: In 1989, the deduction was claimed on only 6.4 million returns, for a total of $12 billion.

The debate over the validity of reinstating the IRA deduction centers on the question of whether money that went into IRAs was new savings, or whether it represented a simple shifting of money from other savings. Both sides in the argument, however, acknowledge that the nation's savings rate must be improved; the average American saves only 5 percent of income, compared with 16 percent for the average person in Japan.

Even if the nation's elected leaders collectively decide that fully deductible IRAs will transform the nation's savings habits, they must still grapple with the question of how to compensate the U.S. Treasury for their largess. Mr. Bentsen said the IRA plan "will be paid for," though he wouldn't specify how.

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