Indexing: tempting cut for Capitol Hill deficit fighters

The signs of late spring are everywhere in Washington. And on Capitol Hill talk of taxes is in full bloom. Since the Reagan administration arrived in town, it seems as if major tax changes have become an annual rite. In 1981, Congress passed the President's mammoth tax cut. Last year saw a $100 billion tax increase. What might this summer hold in store for the weary US tax code?

The third installment of the income tax cut appears relatively safe. But a tougher fight is brewing over possible repeal or delay of the indexing of tax brackets to inflation - scheduled to take effect in 1985.

''Indexing is more significant to us (than the third year of the personal tax cut),'' says an aide to Rep. Dan Rostenkowski (D) of Illinois, chairman of the tax-writing House Ways and Means Committee. ''But getting rid of it is going to be a real battle.''

Income-tax indexing was one of the many last-minute ornaments hung on the 1981 tax bill before it was hurried through Congress. Though added in haste, indexing was one of the most far-reaching parts of the bill. It would eliminate ''bracket creep,'' the phenomenon whereby cost-of-living increases bump taxpayers into higher tax brackets, even though their purchasing power remains the same.

But indexing's attributes make it a tempting target for members of Congress searching for ways to shrink the huge deficits predicted for 1985 and beyond.

First, US taxpayers would find it hard to miss something they have yet to receive.

Second, indexing's repeal would help Congress solve the problem of ever-larger deficits by bringing in ever-increasing amounts of money. The revenue would ''compound, like interest,'' notes a Joint Committee on Taxation specialist, rising from $6 billion in 1985 to $40 billion in 1988.

Third, some claim indexing just isn't necessary.

''Since 1961 Congress has fully offset the impact of bracket creep with ad hoc tax reductions,'' says Walter Heller, chairman of the Council of Economic Advisers from 1961 to 1964.

But indexing's demise would affect the middle and lower classes more than the rich. After all, those in the top tax bracket are already immune from bracket creep.

Without indexing, a couple with taxable income of $28,600 will see the share of income they pay in taxes jump from 29 percent today to 35 percent in 1988, estimates Dr. Robert Genetski, chief economist of Harris Bank.

And its opponents claim that repeal of indexing would increase the share of national income sliced off by the US government for taxes. President Reagan has vowed he will veto any bill that tinkers with indexing or the third year of the personal income tax cut. House Republicans said Thursday they had enough votes to uphold any such veto.

Tampering with the third year of the tax cut would be living dangerously, Representative Rostenkowski's aide admits. But he insists that indexing remains a much more vulnerable target.

''Clearly, the White House has lashed itself more tightly to the third year (tax cut) than to indexing,'' he says.

Congress appears to be inching inevitably toward some sort of tax increase, and modifying or repealing indexing is a relatively painless way of raising revenue, says a lobbyist who has watched years of congressional tax struggles.

''Ultimately (Republicans) are going to be compelled to accept deferral (of indexing),'' he predicts.

One attempt to push back indexing's debut has already been mounted: On Thursday, Sen. Thomas F. Eagleton (D) of Missouri introduced legislation that would postpone the beginning of tax indexing until the federal budget deficit falls to 2 percent of the US gross national product.

Other major items on congressional lists of revenue-raising options include some sort of a surtax and a fee on imported oil.

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