Key Issues Stall Deal on Budget : Deficit: The major stumbling blocks are Social Security and taxes. But Bush may agree to a short postponement in Monday’s automatic cuts.

White House and congressional negotiators inched closer to a deficit-reduction accord Friday in hopes of heading off $85 billion in mandated federal spending cuts on Monday, but they remained at an impasse on key issues, such as Social Security and capital gains taxes.

A key Republican leader said that if a budget deal seems within sight over the weekend, President Bush may agree to a short postponement of the automatic spending cuts required by the Gramm-Rudman law to avoid a crippling shutdown of government services on Monday.

“But they must be very, very close to a package before the President would sign off on that,” cautioned the GOP leader, who spoke on condition of anonymity.

The eight-member negotiating team prepared to work today and Sunday, if necessary, to strive for an agreement that has been eluding the two sides since Bush convened the talks last May.

Even before an accord was reached, however, both Democratic and Republican leaders voiced apprehension that Congress may not accept a five-year, $500-billion deficit-reduction package containing a variety of new tax increases and a dramatic cutback in the popular Medicare program.

John H. Sununu, the White House chief of staff, told House Republicans that the Bush Administration was “very close to a deal,” but he said that important issues remain unresolved, including how to make sure that Congress abides by any new spending limits.

House Speaker Thomas S. Foley (D-Wash.), addressing the Democratic caucus in the House, received a standing ovation after he urged his fellow party members to be patient in the climactic stages of the bargaining.

But a key Democratic aide said the outlook was “grim,” since the negotiations were still snagged so close to the Monday deadline. “We’re not as close as we would like to be,” the aide said.

Rep. C. Christopher Cox (R-Newport Beach), who attended a presentation by Sununu and Budget Director Richard G. Darman, said afterward: “They did not deny that they are miles apart on enforcement. . . . It sounds like they are miles apart on a deal, unless they are willing to accept one without teeth.”

Cox also noted that disclosure of details of the package--both in news reports and by White House officials--was not reassuring to the GOP caucus. “It would be very difficult for the leadership to get Republican votes for a package that is looking increasingly ugly.”

Other sources disclosed that variations of President Bush’s proposal for a sharp cut in the capital gains tax rate were still being discussed, along with Democratic counterproposals for offsetting tax increases for people with incomes above $100,000, who would receive the greatest benefit from such a change.

Congressional sources said Democrats suggested excluding 30% of capital gains--profits from the sale of stocks or other assets--from taxation, while Republicans pressed for excluding 40%.

At the same time, the two sides remained split on how heavily to tax ordinary income of upper-bracket taxpayers. Democrats sought to increase the top tax rate on ordinary income from the current 28% to a new level of 32%, while GOP negotiators wanted to limit it to 31%.

White House negotiators, meanwhile, dropped a proposal to index capital gains to offset the impact of inflation on profits from the sale of stocks and other investments. GOP sources said that the restrictions proposed by Democrats would reduce its effectiveness as a stimulus to the economy.

Sununu told about 30 Republican House members that a reduction in capital gains tax rates was “neither off nor on”--a sign that the negotiations were still in flux. But he said that any agreement would have unspecified “growth incentives” even if capital gains provisions were not included, a GOP participant said.

The White House also was reported to be resisting any changes in Social Security payments, dropping an earlier proposal to delay a cost-of-living increase for three months following protests from Republicans in Congress.

Democrats, however, were pushing for taxing 85% of Social Security benefits for retired persons with incomes of more than $25,000 for an individual and more than $32,000 for a couple.

A wide gulf separated the negotiators on the issue of enforcement--an issue that is little understood, but it is important to lawmakers who want to nail down the spending cuts both sides have tentatively agreed to make in the next five years.

House Republican Whip Newt Gingrich (R-Ga.) demanded that the summit bargainers allow a group of GOP House members to review an agreement for 24 hours before unveiling it to the public, to make sure it deserved the party’s backing.

Sununu reportedly gave assurances that Gingrich and other participants in the broader budget summit talks would have a chance to give their opinions before a deal was finally concluded.

Despite the fairly optimistic reports from the negotiating teams, Democrats prepared fallback positions in case the talks collapsed or hit a major snag.

House Democrats were expected to ram through an alternative budget of their own in an extraordinary session of Congress on Sunday when they also will seek to pass a bill that would delay automatic spending cuts and keep funds flowing to the government through Oct. 20.

Bush, however, has threatened to veto any such delaying action if there is no accord at the budget summit or if the talks collapse. If his negotiators recommend an extension of five or seven days, Bush would agree, one GOP leader said.

THE BUDGET SHOWDOWN: THREE SCENARIOS

As negotiations continue on a long-range pact to pare the federal deficit, government agencies and employees are bracing for the possibility of severe funding cuts and furloughs on Monday. While the outcome remains far from certain, officials say one of three basic scenarios is likely to unfold over the weekend.

SCENARIO ONE: CRISIS AVERTED

White House and congressional negotiators reach agreement on a plan to cut the deficit by $500 million over five years, with a $50-billion reduction during the 1991 fiscal year that begins on Monday. The agreement contains a combination of spending cuts and tax hikes.

Congress passes a stopgap “continuing resolution” to keep the government operating at current funding levels for several weeks, giving lawmakers time to pass 1991 appropriations measures and enact tax increases and benefit reductions. President Bush signs the measure.

The resolution waives provisions of the Gramm-Rudman law that would require severe spending cuts, effective Monday. The waiver is necessary because the $50 billion in cuts for 1991 fall far short of the deficit reduction called for under the law.

SCENARIO TWO: WIDESPREAD CUTS

Negotiators fail to devise a deficit reduction accord before Monday. Congress passes a continuing resolution to keep the government in business for several weeks, but leaves out the Gramm-Rudman waiver to avoid a presidential veto. Bush signs the resolution.

The Gramm-Rudman process known as “sequestration” begins Monday. Funding for defense and a wide variety of domestic programs is cut by about one-third. More than 1 million federal employees have their working hours reduced and many government services are disrupted.

“Safety net” programs are spared from the cuts, including Social Security, Medicaid, food stamps, child nutrition, supplemental food, federal retirement, disability and workers compensation. Medicare cuts are limited, and interest payments on the national debt continue.

SCENARIO THREE: GOVERNMENT CLOSES

The budget negotiations collapse. Congress passes a continuing resolution in an effort to keep government operating and to waive the Gramm-Rudman sequestration process. The measure is vetoed by Bush, and Congress is unable to override.

The government effectively shuts down on Monday. Agencies close, employees stay home, benefit payments cease, and bills go unpaid until White House and congressional negotiators can reach an agreement.

The President could elect to keep some essential government services operating by invoking the provisions of a 10-year-old legal opinion that authorizes emergency funding at his discretion.