THE BUDGET : By Axes or Taxes

The annual budget games begin in Washington this week. The objective this year is to reduce the federal budget deficit to a target of $144 billion.

There are four ways to score points. One is by raising taxes, a hard thing to do unless you call it enhancing revenues, which sounds better. Another is by cutting domestic spending; since that is not an easy thing to do in an election year, the players prefer to say they are controlling discretionary spending. You can also score on defense, by cutting spending--hard--or by reducing cost overruns at the Pentagon--easier. Finally, the most difficult way to score points is by cutting Social Security. Since no one wants to do that, Social Security has been labeled an “entitlement program” (suggesting something that people are entitled to).

The principals are pros from previous seasons: the Administration team, led by President Ronald (“the Gipper”) Reagan; the Senate Republican majority, led by Sen. Bob (“the Lip”) Dole, and the House Democratic majority, led by Speaker Thomas P. (“the Refrigerator”) O’Neill Jr.

What makes this year’s budget game different is that it is being played under new rules, Gramm-Rudman rules approved by the players themselves last December, having less to do with the Marquess of Queensberry than with the Marx Brothers.

Under these rules, if the players don’t score enough points by the deadline, they will all pay a penalty. A package of drastic cuts will go into effect next October. Domestic programs will be cut 25%, beyond Reagan’s wildest dreams. Defense will be cut by 18%, beyond his wildest nightmares. In fact, that would be just about the size of defense cuts proposed by the Rev. Jesse Jackson in his 1984 presidential campaign, but without any of the money being used for “human needs.”

In other words, if the players can’t work their differences out, everyone will end up miserable. Just to make people feel better, these automatic cuts have been given a new name: sequestration. We got a foretaste of sequestration last month. In a bizarre spectacle, the U.S. comptroller general, Charles A. Bowsher, appointed by the President, issued an order telling Reagan exactly what cuts he must make in this year’s federal spending. These cuts, totaling $11.7 billion, will go into effect March 1.

President Reagan certainly doesn’t like it. “If the Congress will cooperate with us in making the cuts that have to be made where we have discretion over them, we’ll never have to resort to the sequestering of programs in which you just automatically go in with a meat ax . . . . I never favored that part of the legislation at all,” said the chief executive, who signed the bill into law on Dec. 12. Congress, already facing a $62-million cut in office funds and expense accounts, doesn’t like it much either, even though the bill passed both houses with bipartisan support. “Self-inflicted fiscal terrorism” is how one congressman described it.

The whole game makes very little sense:

--There is no guarantee that everyone will play by the rules. Many suspect that the President will simply refuse to cut defense by $25 billion this fall, claiming his constitutional obligation to protect the national security.

--There is no agreement on how many points have to be scored. In mid-January, the White House budget director said that the projected 1987 deficit was $200 billion, which would require spending cuts of more than $50 billion. A week later, the Administration revised its deficit estimate to $182 billion, requiring $38 billion in cuts. “What did they do?” asked Dole, “Juice up the growth?”

--There is an effort underway to invalidate the rules. A group of congressmen led by Rep. Michael L. Synar (D-Okla.) is challenging the constitutionality of the Gramm-Rudman procedures in federal court. They claim that Congress does not have the right to delegate its authority over the budget; thus, by June, the game may have a new referee--the U.S. Supreme Court.

--The players may decide to stop the game themselves. Congress can vote to change the Gramm-Rudman deficit targets, postpone the cutoff dates or simply scrap the whole procedure. “I can see such chaos by late summer that people will seriously start thinking about squirming out of the law,” said one high-level congressional staffer.

The first move in the game is Reagan’s, when he sends his 1987 budget to Congress this week. That budget does not look much different from budgets he has submitted in the past: no new taxes, a 3% real increase in defense spending and no Social Security cuts. Domestic programs will bear the full brunt of cuts. This year, however, the proposed cuts will be exceptionally severe: elimination of programs--the Small Business Administration and general revenue sharing; sale of federal assets--the Federal Housing Administration and naval petroleum reserves; cuts of $1 billion in programs for the poor, and another $10 billion in pensions, veterans’ benefits and medical programs.

The President’s 1987 budget is likely to fare no better with Congress than his previous budgets, despite the threat of the Gramm-Rudman deadline. This is, after all, a congressional election year. Last year, the President’s budget proposal was declared DOA--dead on arrival. This year, congressional leaders of both parties are calling it DBA--dead before arrival. “It can’t fly and won’t fly,” said Senate Budget Committee Chairman Pete V. Domenici (R-N.M.). “It’s cold turkey, done, finished, dead, gone,” said House Armed Services Committee Chairmen Les Aspin (D-Wis.).

Well, not quite. Because congressional Republicans see President Reagan’s budget as an embarrassment, Speaker O’Neill wants to make sure their embarrassment is officially recorded. He intends to force a vote, making Republicans either break with the President or go on record as supporting his budget cuts.

Does Congress have a counterstrategy? Many people suspect that Congress will do what it usually does about the deficit--nothing serious. Then, after months of debate and indecision, Gramm-Rudman deadlines will arrive shortly before the midterm election and Congress will panic. “We’re kind of like kids in college,” said Rep. Richard A. Gephardt (D-Mo.). “We don’t get serious . . . until the night before the final exam.”

Actually, the way the game is played, incentives for members of Congress to avoid sequestration are not very strong. Rather than vote to cut popular programs, a legislator may prefer to see the automatic cuts kick in. “I see Gramm-Rudman as a disincentive for making the hard choices,” said House Budget Committee Chairman William H. Gray III (D-Pa.). “What happens if your favorite programs are slated for elimination or you see the consensus moving to cut them 50% or 75%? It is not in your interest to have a budget.” There is also the problem of “double hits.” If your program is cut during the regular budget cycle and the overall budget target is not reached, then it will be cut again when funds are sequestered. Better, then, to protect your program from initial cuts, even if that makes automatic cuts more likely.

Some members of Congress wonder if sequestration would be such a terrible thing. Social Security is protected, as are many programs targeted at the poor. Half the cuts would come from defense and the other half from programs and services used mostly by middle-class Americans. To many liberals, that’s not a bad deal. How else would they ever get a $25-billion defense cut? Moreover, some conservatives would be willing to swallow the defense cut just to make sure taxes are not raised.

Congressional leaders who consider themselves more responsible are trying to work out a “grand compromise,” a deal to avert the automatic cuts. The idea is for the three big players to agree on a compromise deficit-reduction package. The President would accept some defense cuts. Congress would accept some domestic spending cuts. Perhaps both would allow a little fooling around with Social Security cost-of-living adjustments.

Oh, and one more thing. “Every member of Congress knows what we have to do,” said Budget Chairman Gray. “We have to deal with the revenue side.” In other words, raise taxes.

Taxes is what the whole Gramm-Rudman contest is about. It’s a gigantic game of “chicken,” each side daring the other to be the first to propose a tax increase. O’Neill is obdurate: Democrats will not vote for a tax increase until Reagan goes on record as supporting it. Just about every day, Republican congressional leaders say a tax increase will have to be part of a grand compromise--and just about every day, Reagan rejects the idea. Sen. Bob Packwood (R-Ore.), chairman of the Senate Finance Committee, met with the President last week and reported that he was “adamant about any kind of sales tax, value-added tax, consumption tax, call it what you want--no.”

But Reagan has changed his mind before. The whole point of Gramm-Rudman is to confront the President with the unpalatable choice of either raising taxes or accepting huge defense cuts. Many people suspect the President is bluffing on taxes and will come around: “He’s said ‘no’ so many times that sometimes we know ‘no’ means ‘yes,’ ” remarked one GOP senator.

There are some tiny signs of flexibility. The President’s budget will allow the federal cigarette tax to remain at 16 cents a pack, instead of dropping to 8 cents on March 15 as now scheduled. That is not a tax increase, Reagan has decided; it merely cancels a scheduled tax reduction. Moreover, a top Administration official has said that the President might be willing to accept a new energy tax as part of the tax reform bill now being considered by the Senate if it could be defined not as a tax increase, but a way of keeping the measure “revenue-neutral.”

In fact, tax reform is another big game going on at the same time, with the same players. It may provide the key to a “grand compromise.” About half the Senate Finance Committee members indicated last week that they favored raising taxes to reduce the deficit. If the President wants tax reform--he calls it the top domestic priority of his second term--he may be persuaded to accept some new taxes in return, to argue that he is still lowering individual rates and making the tax structure fairer.

While a tax increase is certainly not popular, the polls reveal that as concern over the deficit has grown, so has the public’s view that we will have to raise taxes. The latest poll, by NBC News and the Wall Street Journal, shows that, by a 2-to-1 majority, the public does not believe the federal budget deficit can be reduced without increasing taxes. The key will be when leaders from both parties and from both branches of government figure out a way of sharing responsibility for doing what more and more voters realize has to be done.

The alternative is a leap into the unknown. Gramm-Rudman cuts would dismantle many economic, social and military programs and probably give rise to a governmental crisis. Congress would claim that the crisis was caused by the deficit. The voters would know better, however--that the crisis was caused by Congress, which is where Gramm-Rudman came from. Voters, in the end, are the scorekeepers in the budget game. They will announce the results at midterm elections on Nov. 4. If they are unhappy, one of their options is to say “everybody loses.”