Big Tax Cut Ahead, But How to Slice It?

After years of jawboning about the need to cut taxes, Washington appears on the brink of offering Americans a period of meaningful relief.

It's not yet clear who will wind up with how much in their pockets. But discussions begin today in the House Ways and Means Committee to fashion the biggest tax break in 16 years - one that will benefit parents, college students, small businesses, and those saving for retirement.

The powerful committee with the odd name starts work on a bill to provide $85 billion in tax relief over the next five years. The legislative blueprint, by committee chairman Bill Archer (R) of Texas, has already generated concern at the White House and outright opposition from committee Democrats.

The tax bill is a key piece in implementing the balanced-budget agreement between Congress and President Clinton. That pact calls for a child tax credit sought by Republicans and the president; "roughly" $35 billion in education tax credits and deductions favored by Mr. Clinton; and capital-gains and estate-tax reductions dear to GOP hearts.

Several of Archer's provisions, while in accord with the letter of the budget agreement, differ widely from the president's interpretation, setting the stage for partisan debate.

Speaking for the administration, Treasury Secretary Robert Rubin says he has "serious concerns" about the bill, noting that it "seems to have moved the tax benefit away from the less well-off, and even away from middle-income people, toward higher-income people."

Here's a look at what Archer's proposal would mean for families and individuals:

Child tax credit. Beginning in 1998, families with children age 17 and younger would get a $400-per-child tax credit if they make less than $110,000 ($75,000 for unmarried persons). This would rise to $500 per child in 1999.

Archer says 41 million children would benefit. Democrats complain that families earning less than $30,000 a year, who benefit from an earned income tax credit, would not get the full $500 credit.

Education. Families could deduct from taxes 50 percent of up to $3,000 for net college costs. The deductions would phase out for families earning between $80,000 and $100,000. The plan also provides a $10,000 deduction paid through "education investment" savings accounts and allows penalty-free withdrawals from IRAs for post-secondary education expenses. In addition, families could deduct up to $10,000 per year of undergraduate expenses paid through state prepaid-tuition programs.

Archer's proposal, however, differs markedly from the president's. Clinton would give families a flat $1,500 tax credit and a direct $10,000 deduction for college expenses. Rep. Charles Rangel of New York, lead Democrat on the Ways and Means Committee, complains Archer's proposal would effectively exclude low-income students at community colleges with lower tuitions.

Capital gains. Married couples making less than $41,200 and single persons earning less than $24,650 in taxable income would pay only 10 percent on profits from investments. Couples or individuals earning more would see their rate fall to 20 percent from the current 28 percent for everyone. The bill would protect from tax any gain on the sale of a house up to $500,000 for couples and $250,000 for individuals.

Estate taxes. Archer would raise to $1 million from $600,000 the value of estates exempt from inheritance taxes. Many argue this would greatly benefit families trying to pass farms and small businesses to the next generation. Critics note, however, that the exempted amount increases gradually - the full exemption would not take effect until 2014.

The proposal also creates "American Dream" savings accounts, or nondeductible IRAs with tax-free earnings. Withdrawals for first-time purchase of a house would also be exempt from taxes.

Already controversial, however, are Archer's proposals to remove the tax benefit for ethanol, a corn-based fuel used in parts of the Midwest, and to tax Indian tribes' commercial activities. Should both pass the House, they could run into stiff partisan opposition in the Senate, where farming and Indian interests are better represented.