Tax Reform Worries Aides of President : They Fear It Will Become Vehicle for Increase Next Year

Times Washington Bureau Chief

President Reagan demonstrated his old political wizardry one more time last week with a dramatic rescue of his campaign for tax overhaul from what appeared to be almost certain death at the hands of rebellious House Republicans.

Yet the jubilation in the Oval Office had hardly died down before his advisers had sober second thoughts about what Reagan had wrought. They began worrying that the tax revision plan that started out as the centerpiece of Reagan's second term may turn out to be something he has desperately tried to avoid--a vehicle for raising taxes.

President's Strategy

Throughout 1985, the President's legislative strategy was to oppose any tax increase while keeping his tax revision program entirely separate from his proposals to use spending cuts to trim the federal deficit. Next year, however, overhauling the tax code and reducing the deficit will almost certainly become intertwined in the Senate, which must take up the tax bill at the same time it begins complying with the Gramm-Rudman plan, which mandates annual reductions in the deficit until a balanced budget is achieved in 1991.

Many in Congress and the Administration agree that because of mounting concern over deficits, the Senate probably will ignore Reagan's adamant stance against increasing taxes and will include a tax hike in any bill it passes in 1986.

A key Republican congressman, who asked not to be identified, said: "Because of Gramm-Rudman being the law of the land, it'll be impossible to keep the budget and tax programs on separate tracks. You'll have simultaneously before you in the Senate the budget fight and the House tax bill, and you're not likely to get a revenue-neutral bill out of that."

And Rep. Morris K. Udall (D-Ariz.) said Reagan's rescue of the tax plan reminded him of "an old saying of Catholics: 'God often punishes people by answering their prayers.' "

In any bill the Senate passes, said Sen. Paul Laxalt (R-Nev.), a close Reagan ally, the movement toward a tax hike will prove especially strong if Congress exempts more spending programs from feeling the teeth of the Gramm-Rudman law. The law, whose key sponsors were Sens. Phil Gramm (R-Tex.) and Warren B. Rudman (R-N.H.), provides for automatic across-the-board spending cuts of non-exempt programs if Congress fails to meet the annual deficit targets.

'Mice in Halls of Congress'

Congress exempted some programs--Social Security and various benefit programs for the poor and veterans--from the automatic cuts and limited the size of the potential cuts in Medicare and other health programs. All other federal services, from defense and foreign aid to regulatory activities and national park maintenance, are subject to the cuts.

"It'll be interesting to see whether the mice around the halls of Congress will nibble Gramm-Rudman to bits," Laxalt said. "They've already taken big hunks out of the cheese by exempting all entitlement programs. There's no more than a 50-50 chance Congress will abide by Gramm-Rudman as it is now written."

Reagan has pledged that, by "cutting or eliminating wasteful and unnecessary programs," the fiscal 1987 budget that he will propose to Congress in February will meet the Gramm-Rudman deficit ceiling of $144 billion. But some of the programs likely to be targeted by Reagan, such as mass transit, health research and the Small Business Administration, have survived past budget battles because of strong support in Congress and are likely to be staunchly defended again next year.

More Heated Battles

In fact, following sharp criticism from many quarters, including Capitol Hill, the White House has already abandoned one budget-reducing plan--a proposal to sell the Federal Housing Administration. The FHA, which insures mortgages for home buyers who would otherwise be unable to get loans, was vigorously defended by members of Congress, the housing industry and even the Housing and Urban Development Department, the FHA's bureaucratic parent.

Even more heated battles can be expected next year when the Senate seeks to grapple with both the tax bill and the budget cuts decreed by Gramm-Rudman. "It'll be a bloody battle to wring the last penny out of the budget before there's any move to increase taxes," said Sen. Pete Wilson (R-Calif.). He said 1986 could be the Senate's most interesting year in history but quickly added, "That's not to be equated with productive."

Regardless of whether Congress meets the Gramm-Rudman deficit goals, White House spokesman Larry Speakes said Reagan remains adamantly opposed to a tax increase. "If there's one thing that's basic with him," Speakes said, "it's no tax increase. I've never heard him waiver."

Increase Called Inevitable

Privately, however, some Reagan advisers say they believe a tax increase is inevitable. And Sens. Laxalt and Wilson both believe Reagan may be willing to accept a tax increase if it means saving the Defense Department from substantial budget cuts that could adversely affect national security.

The President is so intent on achieving revision of the tax code and protecting his defense buildup, said Lyn Nofziger, a longtime Reagan adviser who is now a private political consultant, that he would probably be willing to accept a tax increase if it meant protecting the Defense Department from a substantial budget reduction.

"It would depend on the size of the tax increase," Nofziger said. "If it's small enough, he would swallow it."

'A Revenue Gainer'

Many Republicans believe the President would be hard-pressed to veto any tax-overhaul bill that emerges from the Republican-controlled Senate.

"I think his advisers would find it difficult to recommend a veto regardless of what kind of bill lands on his desk," said Rep. Dick Cheney (R-Wyo.). "And when we get in the middle of the budget fight next year, what is now a revenue-neutral bill very likely could become a revenue gainer. I've been told by some of my friends in the Senate that . . . they'll use the bill as a vehicle for raising revenue."

Although Congress may have seized control of the tax and budget agenda from Reagan, the President's rescue of the tax revision plan last week has put a stop to talk that, with three years remaining in his presidency, he is already a powerless "lame duck." He still is extraordinarily popular nationwide, has great rapport with congressional Republicans and is likely to be a major factor in next year's tax and budget battles.

'Carries a Big Stick'

"The guy still carries a big stick and he showed it on the tax bill showdown," Cheney said. "He was able to revive the package when people thought it was dead, and there wouldn't even have been tax reform on the agenda if he hadn't put it there."

But Reagan admitted that the House bill failed to meet all of his objectives for tax revision and promised House Republicans to work in the Senate next year for improvements. He will need all his legendary powers of persuasion to achieve them--and to keep tax overhaul from evolving into a deficit-reducing tax increase.

"He is going to have to do an awful lot of hard work on the tax bill to make it more acceptable to him, and it will require a hands-on approach," Laxalt said. "He can't delegate it. "

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