Progress on Cutting Budget Deficit Told by Negotiators

TIMES STAFF WRITERS

Negotiators for the Administration and Congress said Tuesday night that they had finally made major strides toward an agreement on cutting next year's federal budget deficit, even as President Bush told the nation that success in their marathon deliberations is critical to U.S. goals in the Persian Gulf.

Democrats involved in the negotiations offered to make further reductions in domestic spending proposals, and the two sides narrowed the gap between their plans for military spending as they attempted to cut next year's deficit by as much as $50 billion and save up to $500 billion over the next five years.

The movement occurred as Bush appealed to Congress in a televised address to present him a deficit reduction package by the end of the month. But, adding a new element to his demand for an agreement, the President, a former oil company owner, insisted that Congress should adopt his proposals to provide tax breaks for domestic energy production and open up Alaskan wilderness areas to oil and gas exploration.

"The gulf situation helps us realize we are more economically vulnerable than we ever should be," Bush said. "Americans must never again enter any crisis--economic or military--with an excessive dependence on foreign oil and an excessive burden of federal debt."

Unlike last month, when Bush assailed Democrats in Congress as having caused the budget impasse, the President adopted a tone of bipartisan goodwill.

"To revitalize our leadership capacity, we must address our budget deficit," Bush told lawmakers, "not after election day or next year, but now.

"I am hopeful, in fact, I am confident, the Congress will do what it should," Bush said.

But, although Republican and Democratic negotiators made significant progress at their budget summit talks Tuesday, they still remained tens of billions of dollars apart on spending cuts and locked in a dispute over who should bear the burden of tax increases.

Both sides put substantial new proposals on the bargaining table at secluded Andrews Air Force Base Tuesday. And the previously pessimistic mood of participants improved markedly.

"I'm optimistic," said Sen. Wyche Fowler (D-Ga.), one of the bargainers. "We're going to try hard to finish as soon as we can."

"I'm on the positive side of the mood swing," White House Chief of Staff John H. Sununu told reporters.

Even as the summit participants recessed the talks to hear Bush's speech, they scheduled a sixth consecutive day of negotiations today and planned to work daily at the isolated air base until they achieve a breakthrough on a deficit agreement.

Without action, next year's budget shortage could exceed $250 billion, compared with the $64-billion deficit target called for under the Gramm-Rudman budget law.

If no deal is struck by Oct. 1, Gramm-Rudman threatens to force roughly $100 billion of automatic spending reductions that congressional leaders and Administration officials have said would cripple federal services and result in unpaid furloughs for nearly all U.S. government workers.

Lawmakers, with White House support, plan to revise the Gramm-Rudman law after a deficit accord is reached, easing the targets and extending the timetable for achieving a balanced budget.

The talks grew serious late Monday night, participants said, continuing until 1:30 a.m. Tuesday to consider a new GOP proposal in response to significant Democratic concessions earlier that evening. They were resumed briefly after breakfast to allow the Democrats to present another plan for consideration by the Republican team.

The negotiators still have to climb "the large part of the mountain," one Republican negotiator said, comparing progress to date with overcoming only the foothills.

An agreement is possible this week, one participant said, but another thought that "it's going to take several more days."

In a major move, Democrats offered to cut domestic spending by $100 billion over five years, including a doubling of their proposed reductions in benefit programs, such as Medicare, to nearly $14 billion next year.

However, Republican negotiators rebuffed the proposal, saying that it would slice only $77 billion to $90 billion off the deficit, and stuck to their goal of a $120-billion to $130-billion cut between now and 1995.

Republicans proposed linking Medicare premiums to income, so that, under one plan, the present $28.60 monthly fee would rise to nearly $115 a month for the most affluent retirees.

Some lawmakers remained wary of raising Medicare fees so sharply, however, out of fear that it could generate a public backlash similar to the one that forced Congress to repeal the 1988 catastrophic care law, which boosted fees paid by higher-income elderly.

Democrats incorporated a lesser version of the Medicare fee plan, first suggested by Sen. Phil Gramm (R-Tex.), in their own proposals and suggested cuts in payments to doctors and hospitals.

On defense, the Democrats and Republicans moved toward a plan to cut next year's $300-billion Pentagon budget by between $10 billion and $11 billion.

Democrats scaled back their proposed five-year cut from an initial $265 billion to roughly $200 billion. Republicans countered with a $170-billion figure, leaving the two sides with a $30-billion gap on military spending.

On revenue increases, sources said both sides agreed to raise an extra $25 billion in the fiscal year that begins on Oct. 1 and a total of $130 billion in taxes in the coming five-year period. But they clashed sharply over how to meet the goal.

Republicans are adamant that any deal include a cut in capital gains taxes--which they argue would bring in more federal revenue and spur economic growth. But Democrats remain opposed to the Republican proposal to lower the tax on investment profits to 15%, calling it an unwarranted tax break for the wealthiest Americans.

Democrats no longer are pushing for an increase in the top tax rate to 35%, one aide suggested, but they still want to raise taxes for the wealthy by imposing a 10% tax surcharge on incomes above $500,000 and introducing a stiff luxury tax on jewelry, furs and high-priced automobiles.

In an official Democratic reply to Bush's address, House Majority Leader Richard A. Gephardt of Missouri insisted that average Americans should not be asked to bear most of the burden of closing the budget gap through higher taxes.

"Just as we must ask wealthy nations to pay their fair share to deter aggression, so we must ask wealthy Americans to pay their fair share to prevent recession and reduce our debts."

Bush, in his speech, hinted that he may finally be willing to bargain with Democrats by accepting slightly higher income taxes on the rich in exchange for a cut in capital gains taxes.

The budget package, Bush said, "must avoid any measure that would . . . turn us back toward the days of punishing income tax rates," a last-minute change in the text of his speech, which had originally opposed any move toward "higher income tax rates."

Democrats would also like to boost energy taxes, proposing a broad 4% tax on all energy products, coupled with a separate 7-cents-a-gallon gasoline tax hike. Republicans have offered a plan to increase gasoline taxes slightly.

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