Perot's proposal calls for sacrifices Deficit-reduction plan would touch rich, poor, middle class, the elderly

THE BALTIMORE SUN

WASHINGTON -- Michael Owen, a Pentagon staffer from Annapolis; Georgeanna Eagle, a receptionist from Bethesda; James and Valerie Smith, a two-income family from Howard County; and many of the nation's retirees have one thing in common: all would be hurt by Ross Perot's deficit-reduction plan.

The Perot program to turn this year's projected deficit of $333.5 billion into a surplus of $8 billion by 1998 calls for wide-ranging sacrifices. These would affect all segments of society -- the poor, the middle class, the rich and the elderly.

Critics say the poor and middle-income people would suffer most, but DRI/McGraw-Hill, a Boston-based financial consulting group that ran the figures through its econometric model for the Perot campaign -- as it did for the Clinton campaign -- found the sacrifices were spread around with reasonable fairness.

"The spending cuts implied are heroic," the analysis said. "The plan is the medicine required to improve economic growth in the long run, but in the short run, the taste could be bitter."

That has brought outcries from interest groups and trade organizations representing those who would be affected. Alongside spending cuts, the Perot program involves steep tax increases, and they would have the most direct effect, taking something from almost everybody's pockets.

The Perot tax proposal with the widest impact would increase the 14-cent-a-gallon federal gasoline tax by 10 cents for each of the next five years, or 50 cents a gallon by 1998.

Michael Owen clocks 70 miles a day in his Chrysler Eagle Premier, commuting from Annapolis to the Pentagon and back, so Mr. Perot's tax increase would cost Mr. Owen an extra $76 dollars a year. That adds up to almost $400 by 1998.

"I'm not a big personal spender of pocket change, but what he has done is to pick my pocket of change for a year," Mr. Owen says. "It's a healthy amount of money, and I will notice it. But I'm fortunate enough to make a decent living. There are less fortunate people out there who will feel it even more."

Like Mr. Owen, opponents of higher gasoline taxes say they are regressive, hitting those least able to pay for it the hardest.

The United States' 169 million drivers would feel the pinch immediately. The average motorist puts a little more than 10,000 miles a year on his car, using roughly 500 gallons of gasoline, according to the American Automobile Association. The 10-cent tax increase would cost motorists an extra $50 a year at the pump.

But, to the extent that it would conserve energy, reduce auto pollution and cut oil imports, the tax increase could have benefits besides cutting the deficit.

Mr. Perot also would immediately double the tax on tobacco. That could cut down on smoking and reduce the $20 billion a year spent on treating smoking-related diseases.

Georgeanna Eagle, who smokes a pack a day, would pay almost $75 more a year. "That's a lot of money," she says. "That's a new jacket or skirt. I already pay enough in taxes, and this is just too much."

Ms. Eagle is one of almost 46 million smokers in the nation. The average smoker, who goes through a pack and a half a day, would see his tobacco bill rise by $110 a year. Ms. Eagle doesn't expect many to quit. "You'll find that most smokers are addicted and will pay almost anything to keep smoking," she says.

"Smokers already pay their fair share, anteing up almost $14 billion a year in tobacco taxes, in addition to what they pay as citizens," says Tom Lauria, a spokesman for the Tobacco Institute, an industry advocacy group. He, too, says lower-income Americans would be disproportionately affected.

Part of the Perot mantra is "stop subsidizing the rich." He asks: "Why should we subsidize interest on huge, expensive homes?"

James and Valerie Smith, a government worker and a real estate agent, would fall victim to Mr. Perot's idea of limiting mortgage interest deductions to $250,000 of principal. The current ceiling is $1 million, set in 1987.

The Smiths' mortgage on their home in The Chase, outside Columbia, is $400,000, the result of professional progress in both of their careers, trading up houses five times and carefully calculating the interest-rate deduction in assessing their ability to pay such a large mortgage. A cutoff at $250,000 would leave them with a balance of $150,000 on which they would be unable to deduct interest.

Based on a national average mortgage interest rate of 8 percent, that would deprive them of a $12,000 deductible, costing them almost $4,000 a year at the current top income tax rate of 31 percent.

"We would be in a terrible state," Valerie Smith said of Mr. Perot's cap. "We couldn't afford to stay here. . . . The thing is, we bought this house because of the tax deduction. Originally, I thought it would be good to have someone like Perot, but I had no idea this would be one of his policies. People have already stretched themselves. They have bought at the highest they could qualify for, taking into account the tax deduction."

The Congressional Budget Office estimates that more than 800,000 of the nation's total 37 million mortgage holders would be affected.

"It would be disastrous," says Ed Hilley, vice president of the Maryland Association of Realtors. "When you see statistics showing real estate is going into a tailspin and new-house sales just dropped 6 percent in one month, anything else would just be the kiss of death."

Another criticism of the interest-deduction cap is that the richest homeowners with other investments would be able to rearrange their portfolios and pay down their out standing mortgages to below the $250,000 cap, depriving a Perot administration of some of the billions it would hope to raise over five years from this move.

Mr. Perot also would eliminate interest deductions on vacation homes, a major source of real estate investment on the Maryland coast and in Western Maryland around Deep Creek Lake.

Many retirees would be hit several ways by Mr. Perot's determination to "protect and manage with care" the federally funded pension programs and to make recipients of Medicare, the health program for the elderly, pay a larger share of the program's costs.

Of the 40 million recipients of Social Security, it is estimated that almost one in five would face higher taxes under the Perot formula.

Currently, 50 percent of benefits are taxable for retired people with incomes above $25,000 a year and couples with incomes above $32,000. Mr. Perot would tax 85 percent of the Social Security benefits of such relatively well-off recipients.

According to the American Association of Retired Persons, a married couple over 65 with an income from Social Security benefits, earnings, pensions and dividends of $40,000 would pay $640 more in taxes under the Perot plan.

Mr. Perot also would decrease the annual cost-of-living increases for 2.5 million federal civilian and military retirees and survivors by one-third over the next five years. Based on a projected annual inflation rate of 3.6 percent, that could reduce the cost of living adjustment for the average federal retiree by $184 in 1994, the first year the Perot plan could be enacted.

The loss would increase by slightly greater amounts in the succeeding four years.

That is not a new idea. Former President Ronald Reagan and President Bush have regularly sought to reduce or suspend the cost-of-living adjustment for federal pensioners.

Judy Park, director of legislation for the National Association of Retired Federal Employees, said, "We have been able, thus far, to keep them at bay. The net result would be they would just keep falling further and further behind in maintaining the purchasing power of their earned retirement dollar."

Retirees paying a premium to receive Medicare supplemental medical insurance, which covers physician visits, outpatient treatment and other medical expenses also would be affected. Mr. Perot would increase the participants' share of the funding by 10 percent, a yearly increase of $197.28 for the average retiree.

"You have a classic situation of medical bills eating up a larger and larger share of their income and forcing a choice between care or food and clothing, etc. More and more people would find their incomes being eroded by their health costs," said Martin Corry, director of federal affairs for the AARP.

In another health-related revenue-raiser, Mr. Perot would lift the $130,000-a-year salary cap on Medicare taxes. Workers with higher wages do not currently pay the 1.45 percent Medicare levy, which covers inpatient hospital treatment, home health care and other nursing facility services, on the part of their incomes above $130,000. Mr. Perot would impose the tax on all earned income. The 1990 Census indicates that would affect more than 1.5 million workers.

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