Calls Accounts ‘Loophole for Wealthy’ : O’Neill Says House May Back IRA Curb

WASHINGTON — House Democrats may be willing to go along with Wednesday evening’s Senate action curbing tax breaks for individual retirement accounts, House Speaker Thomas P. (Tip) O’Neill Jr. (D-Mass.) said Thursday as the Senate resisted a series of efforts to modify the Finance Committee’s tax revision package.

IRAs are a “mighty loophole for the wealthy of America,” O’Neill told reporters, suggesting that an estimated 20 million taxpayers who would lose IRA tax breaks under the Senate bill should not count on House Democrats to fight for a generous IRA provision in the final tax overhaul bill.

Proposal Debated

The Senate debated a proposal Thursday that would allow a taxpayer to choose between a deduction for state income taxes or sales taxes, whichever is greater. The proposal would primarily benefit taxpayers in the handful of states--such as Nevada, Texas and Washington--that rely on sales taxes but do not have an income tax. To pay for the change, the plan would restrict the ability of taxpayers to borrow against their home to pay for other expenses.

But Sen. Daniel J. Evans (R-Wash.), the sponsor of the amendment, withdrew it after it became clear it would fail.

The Senate also dodged a difficult issue by adopting, 76 to 21, a non-binding resolution urging negotiators to restore the state sales tax deduction in a conference with the House. The resolution did not say where tax writers should find the revenues for the five-year, $17-billion cost of maintaining the deduction.

Democrats are divided over whether to attempt to exploit the IRA issue politically by rallying to the defense of the widely used tax break, or to accept the position adopted in the Republican-controlled Senate that deductions for IRA contributions should not be given to workers who are already covered by company-sponsored pension plans.

‘For O’Neill Only’

O’Neill was “speaking for O’Neill only,” cautioned John Sherman, a top staff aide to House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), who will lead House tax writers when they meet with their Senate counterparts to work out the differences between the House bill adopted last year and the plan currently being debated in the Senate.

The House Democratic leadership has not agreed on a strategy for dealing with the issue in conference, Sherman said.

But he also pointed out the dilemma facing House Democrats. Even though IRAs may be one of the more politically popular tax breaks--defended vigorously by nearly every senator running for reelection this year--it is a “terrific paradox to see a liberal Democrat pounding the table for a benefit that goes largely to the well-to-do.”

Under Pressure

Rostenkowski, however, has told several groups privately that he is under pressure to defend the House position on IRAs, which would allow all workers except those with 401(k) retirement plans to continue to receive a deduction of up to $2,000 for contributions to an IRA.

Meanwhile, the Senate continued to oppose any tinkering with its sweeping tax bill, rejecting by a voice vote a proposal to restore the deduction for state and local sales taxes by partly limiting all deductions. Lawmakers also turned back by a 79-22 vote an amendment offered by Sen. Lowell P. Weicker Jr. (R-Conn.) to curb oil and gas partnerships in the same way that the bill restricts real-estate tax shelters.

Action Seen Next Week

Only a handful of other substantive amendments stand in the way of final action on the bill, which is expected to be overwhelmingly approved next week.

Among the amendments still expected are proposals to maintain charitable deductions for non-itemizers, to provide greater relief to middle-income families by imposing a higher tax rate on wealthy taxpayers and to prevent an increase in the effective capital gains tax rate.

One amendment that once was expected to delay action, a proposal to eliminate tax exemptions for abortion clinics, was withdrawn by its Senate sponsors Thursday after they failed to persuade President Reagan to support their effort to attach it to the tax bill.