Late-Night Session on Deficit Held : Budget: The White House has high hopes for an accord despite slow progress. Negotiators warn the effort still may fail.

With the White House in an optimistic mood, budget negotiators plunged Wednesday into a late-night session in a drive to wrap up major parts of an agreement to slice $500 billion from the federal deficit over the next five years.

After dramatically narrowing the gap in recent days, progress was made “millimeter by millimeter” when the talks turned to the divisive issues of taxes and enforcement of any accord that is reached, Rep. Robert H. Michel (R-Ill.) said.

A source close to the bargaining said negotiators discussed doubling the 16-cent-a-pack tax on cigarettes to raise $13.8 billion over five years to help meet a $130-billion revenue package target. However, no agreement on the cigarette tax was achieved.

Despite high hopes for a budget deal, participants in the high-level talks warned that the negotiations still may collapse because of the politically painful decisions that must be made to reach the deficit-cutting goals.

“We’ll work through the night,” said Rep. Leon E. Panetta (D-Carmel Valley), one of the summit participants. “The next 24 to 48 hours will tell us whether we get agreement.”

“We are a long way from reaching agreement and we’ve got major problems to resolve,” Rep. Bill Archer (R-Tex.) said. “This is probably the toughest negotiation I have been in during my 20 years in Congress.”

In a related development, the General Accounting Office said the deficit was so “out of control” that Congress would have to approve another $550-billion deficit-cutting package by 1996-97 to restore the government to fiscal health.

The estimated deficit for the fiscal year starting Oct. 1 has increased between $25 billion and $35 billion beyond the last official forecast of $232 billion made in June by the Office of Management and Budget, the director of the Congressional Budget Office testified.

CBO chief Robert D. Reischauer said worsening economic conditions accounted for the higher estimate he provided for the Senate Banking Committee.

The budget talks hit a snag again Wednesday when Democrats balked anew at the Republican push for a cut in capital gains taxes and the GOP side rejected a Democratic proposal for a surtax of 20% on incomes of more than $500,000 a year.

There was further slight movement, however, on reconciling rival Republican and Democratic proposals for higher taxes on beer, wine and hard liquor.

However, no final agreement was reached on how much those “sin taxes” should be, Archer said. A tax on luxury goods also appeared likely.

Most of the discussions occurred in sub-groups until the negotiators recessed so they could return from their isolated bargaining arena at Andrews Air Force Base to vote on Capitol Hill. They resumed talks Wednesday night and continued until early today. New meetings were scheduled to begin at 8 a.m.

At the White House, presidential spokesman Marlin Fitzwater remained optimistic.

“Clearly, in committing themselves to this extended negotiation . . . the negotiators have expressed a very strong desire to reach an agreement,” Fitzwater said.

“So, we can’t say when, but we’re hopeful in the next day or two or three, we’ll get something.”

If an agreement is reached, he said, negotiators probably would report to Bush at the White House so everyone could “bless all the provisions and make sure that they are all satisfactory to both sides.”

If there is no accord, Fitzwater said, the President would submit his own $500-billion, five-year deficit reduction package and ask Congress to vote it up or down by Sept. 28.

Without any agreement before Oct. 1, the Gramm-Rudman law will require automatic spending cuts of $100 billion that the White House and congressional leaders believe would have a catastrophic effect on government services and cripple most federal agencies.