Key Democrats Predict Standoff Over Budget : Congress: With Bush’s plan still under wraps, leaders say they want more defense cuts and a capital gains deal.

Frustrated Democratic congressional leaders, anticipating that President Bush will send them a budget they will feel compelled to refuse, foresee a year of deadlock as they start to shape an alternative spending plan.

Interviews with key lawmakers indicate that one likely outcome is a determined Democratic drive to cut defense spending by billions of dollars more than Bush apparently intends to propose. Any savings would be diverted either to reducing the federal deficit or to bolstering social programs favored by Democrats but targeted for reductions by Bush.

Another probable development is a belated embrace of the President’s proposal for a capital gains tax cut, coupled with an expansion of individual retirement accounts or other provisions designed to let Democrats share in the political glory.

Lingering Democratic bitterness over the results of last year’s budget battles, however, virtually rule out another bipartisan effort to reach a budget accord this year between Congress and the White House.

A series of information leaks have indicated that the President will send Congress on Jan. 29 a $1.231-trillion budget calling for relatively restrained Pentagon outlays of $295 billion for the 1991 fiscal year starting next Oct. 1.

Bush’s planned budget cuts--including a reported $8-billion reduction in outlays for the Medicare program alone--are designed to help meet the Gramm-Rudman target of reducing the deficit to $64 billion by fiscal 1991.

However, long before the budget’s scheduled arrival, it already has come under fire from Democratic congressional leaders.

“Bush II, I might call it, with the same, tired list of cuts that Congress never accepts,” said Sen. Jim Sasser (D-Tenn.), chairman of the Senate Budget Committee.

“If it’s simply a warmed-over (Ronald) Reagan approach, then it could be a very long year,” said Rep. Leon E. Panetta (D-Carmel Valley), chairman of the House budget panel.

Sasser foresaw defense spending as the most likely area to undergo radical surgery, particularly in light of the reduced military threat posed by East Bloc nations.

“We’ll start with a hard freeze, a literal freeze,” the senator said. “That will yank spending down $8 billion below what they are proposing.”

Panetta, however, was more cautious in his assessment of possible savings in military outlays.

“Dangerous hopes are being raised,” he said. “Savings must come over a period of four to five years and be tied to very important decisions on future military strategy and economic conversion plans that will cushion the impact of the defense industry cutbacks.”

But the California lawmaker noted that if the President sticks by his pledge to avoid new taxes in the 1991 budget, then “the reaction of Congress will be to seek larger cuts in defense.”

Both Sasser and Panetta agreed that a capital gains tax cut, which would reduce income taxes paid on profits from sales of stocks, bonds and other investments, probably would be enacted into law this year.

Reducing the capital gains tax was one of Bush’s top priorities in 1989. A tax cut measure passed the House last year, but it was stopped in the Senate largely because of a strong stand by Majority Leader George J. Mitchell of Maine.

Sasser and Panetta said in separate interviews that last year’s unsuccessful measure would be revised and combined with other provisions favored by Democrats. The expanded bill would allow the Democrats to share political credit for cutting taxes with the President.

Sasser said Democrats in the Senate would support a reduction in capital gains tax rates if the legislation provided incentives for long-term investment, such as a sliding scale tax rate based on the length of time an asset was held.

Expansion of IRAs--known as do-it-yourself pensions--could be added to a capital gains measure to encourage greater savings, Sasser said.

Panetta said he would like the President to support a tax change to deal with a tax law inequity known as “the bubble,” which allows those in top tax brackets to pay a lower tax rate than others who earn less. For example, a couple with combined income between $72,000 and $172,000 a year has a marginal tax rate of 33%, compared to a 28% rate for a couple with income above $172,000 a year.

“If the President wants to get something on capital gains, he has to do something to deal with the bubble issue,” Panetta said.

Sasser and other Democrats said they did not think a plan to raise the top tax rate to 33% would be revived after its defeat last year in the House.

“House members took so many hits on raising taxes that I am dubious that will be raised seriously this year,” Sasser said. “The wounds are too fresh. They (Republicans) raised some real welts on folks.”

As a result of the standoff, there is little prospect for a bold plan of deficit reduction advanced recently by Rep. Lee H. Hamilton (D-Ind.), chairman of the Joint Economic Committee.

Hamilton urged the President and Congress to raise taxes by $20 billion or more and to cut spending by the same amount to make a decisive move to eliminate a deficit now estimated at $152 billion.

“I don’t think this President is serious about deficit reduction yet,” Sasser said.

Discussing the proposal by Hamilton, a congressional budget expert said: “It can be done, it should be done, but it won’t be done this year.”