WASHINGTON — Senate Republicans, struggling to revive President Bush's derailed plan to cut capital gains taxes, unveiled a proposal Thursday that would reduce the capital gains tax rate permanently and create a new form of tax-sheltered individual retirement account, as some Democrats want.
The proposal, drafted by Sens. Bob Packwood of Oregon and William V. Roth Jr. of Delaware, would pare the tax rate on capital gains--profits from the sale of stocks or other assets--according to how long the assets have been held. As much as 35% of profits from assets held for seven years or more would be excluded from taxable income.
The measure also would establish "IRA-Plus" savings accounts, whose tax benefits would be felt upon withdrawal instead of deposit. Contributions would not be deductible, but individuals could withdraw up to 25% of their accounts tax-free at any time to buy a first home or pay college or medical expenses. After age 59 1/2, all withdrawals, including interest, would be tax-free.
The Bush Administration quickly embraced the Packwood-Roth measure. Treasury Secretary Nicholas F. Brady said the Administration would "welcome" the new capital gains proposal and urged the Senate to act on it promptly.
Senate Democrats also appeared willing to go along with the proposal. Sen. David L. Boren (D-Okla.), leader of a small group of Democrats who were drafting their own capital gains proposal, endorsed the Packwood-Roth measure, calling for "strong bipartisan support" to help push it through.
The House has already attached a 30% temporary capital gains tax cut to its version of deficit-reduction legislation. The Senate ducked the capital gains issue last week when it passed its own deficit-reduction bill, but Senate Democrats have said repeatedly they want any capital gains proposal to be coupled with an an expanded IRA.
Packwood, who is the top-ranking Republican on the Senate Finance Committee, said he will probably seek to attach the new proposal to a routine bill to raise the limit on federal borrowing, which is slated to reach the Senate floor late this month or early in November.
He said 35 of the 100 senators have agreed to co-sponsor the legislation and about 55 to 58 have indicated that they will support the bill--enough to push it through intact unless it faces a Democratic filibuster. Because of the special rules that applied to the deficit-reduction bill, 60 votes would have been needed to tack the capital gains measure to that bill.
Republicans, conceding that they would be unable to muster the 60 votes, agreed to drop the capital gains issue, and the deficit-reduction bill passed, 87 to 7. Now the Senate bill must be reconciled with a House-passed bill that includes a temporary capital gains tax cut, and House negotiators balked Thursday at stripping that provision from the bill.
House Democrats served notice that they might thwart the Senate strategy of tacking the Packwood-Roth proposal onto the debt-ceiling bill. House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) said he would block any such effort there.
Under the Packwood-Roth proposal, taxpayers would be allowed to exclude from their taxable income a full 5% of the profit they make from the sale of an investment for each year that they have owned the asset. The maximum exclusion would be 35% for assets held seven years or more.
The effect would be to reduce the top tax rate on capital gains to between 26.6% for assets held one year to 18.2% for assets held seven years or more.
As an alternative, individuals would be able to reduce their taxable income by the amount of their capital gains that merely reflect the impact of inflation.
The corporate capital gains tax also would be reduced according to how long assets have been held. The tax rate, now 34%, would be reduced to 33% for assets held for three years and 29% for those owned for 15 years or more.
The bill would apply to all assets sold after Oct. 1.
The proposal for new IRA-Plus accounts was drafted by Roth.
Under current IRAs, individuals whose incomes are not too high are allowed to deduct their contributions, but the withdrawals are taxed in full.
Contributions to IRA-Plus accounts, by contrast, would not be deductible. Instead, the money could be withdrawn tax-free on retirement, or a taxpayer could withdraw up to 25% tax-free to buy a home or pay college or medical costs.