Fears of Fiscal Chaos Kept Talks From Total Collapse

Right down to the end, the deal almost fell apart.

It was Sunday morning on Capitol Hill.

President Bush, interrupting a round of high-level meetings at the United Nations, was already preparing to return to the White House from New York to bless the five-year, $500-billion deficit-reduction agreement that top Administration officials and a handful of congressional leaders essentially had completed at 2:30 a.m.

The negotiators, who had been up practically all night, were in the spacious office of Senate Majority Leader George J. Mitchell (D-Maine) going over some of the unfinished details of the complex package. But then, said one GOP participant, House Majority Leader Richard A. Gephardt (D-Mo.) tried “to renege on the defense number.”

“If you do that, the deal is off!” shot back Richard G. Darman, director of the White House Office of Management and Budget.

Although Democrats contend that Darman was edgy because he had just been outmaneuvered by another Democratic lawmaker, the outburst still seemed a fitting climax to more than four months of endless, intractable bargaining over a painfully austere federal budget that is destined to reshape the nation’s economic and political landscape for years to come.

Indeed, at several stages in the negotiations, many of the participants were convinced that the talks were bound to collapse. But each time the talks resumed, with both Republicans and Democrats fearing the widespread fiscal chaos that would result if Washington’s divided government failed to produce a deficit-reduction agreement.

“They were condemned to succeed,” said one budget official.

It didn’t all come together, however, until the last possible moment. “This is like a basketball game,” White House Chief of Staff John H. Sununu said in early September. “It almost all happens in the last two minutes. Oct. 1 is when the clock goes off.”

Ironically, when time finally ran out, Sununu was in the stands. “His attention span had long before been exceeded,” said one official.

On Friday night, the normally brusque Sununu even took time to pour coffee politely for the waiting press corps outside the room rather than join the negotiators inside. And he was wandering with an Irish curling stick through a nearby ceremonial room Saturday night, studying the portrait of George Washington, while crucial deals were being sealed in House Speaker Thomas S. Foley’s (D-Wash.) blood-red dining room--a room that Sununu had wryly dubbed “the Budget Summit Solution Room.”

Inevitably, nobody was really happy with the final result that emerged from that room.

“Sometimes you don’t get what you want, and this is such a time for me,” Bush confessed Sunday, surrounded in the White House Rose Garden by nearly all the participants in the budget talks. “And I suspect it’s such a time for everybody standing here.”

“This isn’t the kind of thing,” Foley said, “that the political system wants to go racing out in the streets and saying, ‘Joy! Joy!’ ”

Bush was forced to abandon--at least for now--his personal crusade to cut capital gains taxes. Democrats were unable to turn the fight over taxation of investment profits to their advantage, giving up on their efforts to impose higher income tax rates on the wealthy.

“In a sense,” said one budget official, “they both gave up on their hallowed ground.”

At several points last week, however, the trade-off between a lower capital gains rate and higher income taxes on the rich seemed within the grasp of the negotiators.

The Democrats had proposed to accept Bush’s capital gains plan if he would go along with boosting the income tax rate on families with incomes above $200,000 from 28% to 32%. Only hours earlier, Senate GOP leader Bob Dole of Kansas had suggested that Republicans could go as high as 31%.

“They came that close,” said one Democratic aide. “They came within a percentage-point.”

Dozens of other plans involving capital gains, including proposals to protect investors against the erosion of their profits because of inflation, emerged in the final week of negotiations.

Republicans as late as midnight Saturday considered reviving the plan to cut capital gains, one budget participant said, but the idea actually “seemed to just fade away” earlier in the week as Dole and House GOP leader Robert H. Michel of Illinois publicly began deserting the White House. “There wasn’t any crystalizing moment,” he said.

Negotiators, who had spent 11 days holed up at Andrews Air Force Base outside Washington, returned to Capitol Hill with only 12 days to go before the Oct. 1 deadline.

It was “11 days of isolation in Camp Run-Amok,” Rep. Silvio O. Conte (R-Mass.) said with a sigh.

Eventually, White House and congressional leaders narrowed the group of 21 participants to a hard-core of eight top leaders to exclude supposed “troublemakers” such as Senate Appropriations Chairman Robert C. Byrd (D-W.Va.) and House GOP Whip Newt Gingrich of Georgia.

As negotiators raced to complete the package, what was left out came to take on even more importance than what was in.

Dole, who hails from a state with several small aircraft manufacturers, demanded that private airplanes be excluded from the new 10% luxury tax. Foley and Gephardt, in return, insisted that the plan to tax expensive electronics equipment be dropped as well.

Although the budget negotiations were tightly controlled and few outsiders were able to penetrate the inner circle, some lawmakers fought tenaciously to protect their interests.

A White House plan to place a $10,000 limit on deductions for state and local taxes was shot down when the entire group of Republican and Democratic lawmakers from New York, a state with high taxes, vowed to vote against any package if it contained the offending measure.

“That killed it,” crowed Rep. Charles E. Schumer (D-N.Y.).

The final struggle was fought over Social Security, a long-standing political battleground for both parties.

White House officials wanted to postpone cost-of-living adjustments for the elderly, while Democrats insisted that they would only accept a plan to boost taxation of Social Security benefits for more affluent retirees.

“Their political strategy was to force us to break our commitments on Social Security,” said one Democrat, “but we refused to fall into the COLA (cost-of-living-allowance) trap.

“Every single night, Sununu kept pounding away at COLAs--first a six-month freeze, then three months, finally two. But we didn’t budge.”

Without Social Security and capital gains, the budget negotiators were also forced to scale back their plans to cut $50 billion off the deficit for the fiscal year that began Monday.

Instead, they settled for $40 billion in first-year savings, a figure that is expected to be eroded even more when the costs of the Persian Gulf conflict are finally added in.

In the end, the budget negotiations forced two unlikely rivals--budget director Darman and Democratic leader Gephardt--into an awkward alliance.

Darman, a Harvard-educated scion of a wealthy New England textile family, and Gephardt, a former St. Louis alderman who ran a populist presidential primary campaign in 1988, come from far different backgrounds and reflect sharply different political perspectives. Yet both staked their considerable reputations on making sure that the talks succeeded.

Both also have further political ambitions. Darman wants to follow his mentor, Secretary of State James A. Baker III, into more prominent Cabinet positions. Gephardt aches to run for President again.

“They spent hours and hours together at Andrews,” one aide said. “They have fundamental philosophical differences but there’s no way they could afford to let the budget summit fail.”

Times staff writer William J. Eaton contributed to this story.