House Democrats Still Differ on Tax Overhaul : Emerge From Closed-Door Session Divided on Whether to Cut Rates or Reduce Federal Deficit

House Democrats, meeting behind closed doors, demonstrated Wednesday that they remain deeply divided over whether to use tax overhaul to cut tax rates or reduce the federal deficit.

The Democrats brushed aside an effort by liberals to require the Ways and Means Committee to produce a bill that would trim the soaring deficit. That left the committee free to proceed with its plan to write a bill that would eliminate some of today’s tax breaks and use the resulting revenue to finance a general reduction in tax rates.

But committee Chairman Dan Rostenkowski (D-Ill.) told reporters that he might not object to allowing the full House to vote on a proposal to turn the committee’s bill into a tax increase.

Tax Hike Opposed

President Reagan, who initiated the tax debate with his own proposal in May, has strongly opposed converting any bill into a tax hike. He would reduce today’s tax brackets to three, with tax rates of 15%, 25% and 35%, compared to the present top rate of 50%, and Ways and Means Committee members have discussed adding a fourth rate of 40% for high-income taxpayers.

Democrats emerging from Wednesday’s meeting were clearly uncomfortable with the outlines of the major tax plans--one prepared by Reagan, the other by the Ways and Means Committee staff--now pending before the committee. But they appeared even more afraid of what would happen should they duck Reagan’s challenge to revamp the nation’s 72-year-old tax system.

Rep. Bill Richardson (D-N.M.) said as he left the meeting that he was surprised at how deeply some members opposed the tax plans now before them. “But it’s a very strong populist issue,” he said, “and it’s the right thing to do and we’ve got to deal with it.”

And Rostenkowski, conceding that tax revision has not yet ignited public support, reportedly told fellow Democrats in the closed meeting: “That doesn’t mean (voters) don’t want a fairer tax system. That doesn’t mean they won’t be mad if they don’t get it.”

Procedures Adopted

After the Democrats’ closed-door session, the Ways and Means Committee met for its fourth legislative drafting session, spending three hours on the procedures it will follow.

‘Revenue Neutral’

Committee members adopted a procedure that will make it easier for them to offer amendments to the pending bill. Rostenkowski initially proposed that any amendment be “revenue-neutral”--that is, that it not result in a tax cut--but the committee decided that an amendment could cost the government revenue.

The committee also decided that, as each provision of the tax code is debated, the change proposed by Reagan will be the starting point for debate unless a majority of committee members vote to substitute the corresponding proposal prepared by the committee staff.

In the meeting of House Democrats that preceded the committee session, at issue was what to do with the additional revenues that would be generated by eliminating tax deductions.

Spending Revenue

Some Democrats, led by the liberal Democratic Study Group, argued that the new revenues should reduce a gaping deficit that is projected to approach or exceed $200 billion a year for the foreseeable future.

“We’ve made the case that tax reform and deficit reduction aren’t incompatible,” said Rep. James L. Oberstar (D-Minn.), chairman of the study group.

But others quickly pointed out that such a move inevitably would be seen as a tax increase--an issue with which President Reagan could pummel Democrats, as he did in last year’s election.