Bush Alters Tax Stand, Backs Off : Budget: The President first says he might OK a higher rate for the rich. But he is said to later reject the option.

President Bush, still searching for a way out of the budget crisis, reversed position twice Tuesday on whether he would agree to raise income tax rates for the rich as Congress began work on a new budget package that may not be finished until after the election.

During a press conference Tuesday morning, Bush appeared to signal that he might be willing to abandon his previous stance and accept a trade-off with Democrats that would reduce taxes on capital gains while raising tax rates for wealthy taxpayers, saying that if it could be “worked in proper balance . . , fine.”

Only a few hours later, however, during a meeting with 16 Republican Senate leaders who opposed any such agreement, the President reportedly switched positions again, rejecting any talk of such a deal, participants in the session said.

“He asked us what we thought. It was unanimous. We all put up our hands and said, ‘no deal,’ ” said Sen. Bob Packwood, the senior Republican on the tax-writing Senate Finance Committee. “If the price of a capital gains cut is going up on the rates, then no deal.”

Bush “agreed with that concept,” said Sen. Ted Stevens (R-Alaska). “It’s done, there’s no way.”

The apparently conflicting positions came as, separately, Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) unveiled his own plan for just such a trade-off that paralleled what Bush had said earlier that he might endorse.

Bentsen’s plan, to be presented to his panel today, also proposes reducing the 10-cent-a-gallon gasoline tax contained in the old bipartisan budget accord to 9 cents a gallon and eliminating a proposed 2-cent-a-gallon tax on home heating oil.

It also would ease the proposed increases in Medicare costs to the elderly by limiting the increase in the deductible to $100, instead of the $150 proposed before (It’s now $75) and trimming back the proposed rise in Medicare premiums.

“Obviously, we’re trying to get to where we don’t hit the average-income person so much,” Bentsen told reporters.

The trade-off that Bentsen is proposing would reduce the tax on capital gains--profits from the sale of stocks or other assets--to 23%, from the current 28%, while raising income tax rates for those earning $200,000 or more to 33%, from 28% now.

In another proposed change, Bentsen would raise the alternative minimum tax paid by some wealthy taxpayers from 21% to 25%.

While Rep. Dan Rostenkowski (D-Ill.), Bentsen’s House counterpart as chairman of the House Ways and Means Committee, has not expressed his views on a second-time-around tax package, the two powerful chairmen met Tuesday to discuss how to break the budget deadlock.

The combination of developments left the budget situation confused again Tuesday--and both sides increasingly skeptical that the lawmakers will be able to put together an acceptable budget plan before the Nov. 6 elections--pointing to a possible lame-duck session this fall.

During weeks of budget summit talks, White House negotiators repeatedly had rejected any sort of trade-off involving capital gains taxes and tax increases for the rich. Yet, Bush indicated that he would accept it, after it was endorsed by House Republicans.

But he apparently reversed himself in the afternoon after talking with Senate Republican leaders. While Bush was meeting with the senators, his chief of staff, John H. Sununu, told businessmen who had lobbied for the capital gains cut that the idea is dead.

“He (Sununu) was pretty hard on that line,” an Administration official said.

House Republicans have said they would support the trade-off that Bush and the Senate Republicans have rejected. Sunday, in a straw poll at a party caucus, roughly two-thirds of the 176 GOP members in the House voted to support such a plan.

The flurry of contradictory events underlines the disarray into which the White House and the GOP have plunged in the wake of the collapse of last week’s budget agreement.

On the one hand, Bush and many other Republicans believe that cutting taxes on capital gains would spur economic growth and help them politically.

But Democrats have insisted that the cut, which would primarily benefit wealthy Americans, must be balanced by increased taxes on the wealthy.

And Bush’s advisers, led by Sununu, have said that they are convinced any move to increase rates would be only the first step toward dismantling the low tax rates that have been the hallmark of GOP economic policy for a decade.

Ironically, tax analysts say that whatever economic benefits might flow from the trade-off, it probably would leave affluent Americans paying even less in taxes.

The reason is that the relief provided to upper-income taxpayers by reduced rates on capital gains would be greater than the increase they would suffer from the higher tax rates for ordinary income.

At the same time, the analysts say that rejuggling the disparate rates would make it more attractive for upper-income taxpayers to try to escape the higher general tax rates by converting more of their ordinary income into investments.

As that fight plays out, both the White House and congressional leaders remain unsure of how to produce a budget package that can pass Congress in the remaining days before the current stopgap funding measure runs out Oct. 19. Bush signed that measure Tuesday, allowing all federal workers to return to their jobs.

The Oct. 19 deadline, in turn, is expected to increase pressure for Bush and congressional leaders to push the whole debate over until after the November election, bringing the lawmakers back for a lame-duck session.

Some aides say that Bush now seems likely to sign a new stopgap measure that would continue to finance government operations until mid-autumn. Earlier, he had vowed not to renew the current authority.

Over the weekend, the House overwhelmingly rejected the budget package produced by months of closed-door negotiations between the White House and congressional leaders.

Congressional committees are now supposed to produce a new budget plan in just three days and Congress is scheduled to complete action just a week later.

“We don’t have time for major surgery,” said Sen. John W. Warner (R-Va.). He said the only way to produce a budget is to stick close to the original plan.

But both White House and congressional leaders concede that the political pressures that encouraged members of the House to balk at that plan Friday will only grow stronger as the election gets closer.

Because of that, the possibility of a lame-duck session--notoriously an unruly and contentious sort of gathering--is now being taken seriously both in the White House and on Capitol Hill.

“We may not be able to avoid it,” said one White House aide. The chances “are increasing,” said Sen. John H. Chaffee (R-R.I.).

Bush, at his press conference, pointedly declined to say that he would veto a new stop-gap spending bill to extend budget deadlines until after the election. A veto would come only “if I felt that it would constructively lead to getting the problem solved,” Bush said.

The budget resolution passed Monday by Congress calls, in theory, for $40 billion in deficit reductions during the current fiscal year and $500 billion over five years. But the details must be filled in over the next several days by congressional committees.

Under the resolution, the deficit would be cut by three major moves--reductions in military spending, which are now relatively non-controversial; cuts in the costs of entitlement programs, primarily Medicare and agricultural subsidies; and tax increases.

During his press conference, Bush said that higher tax rates for the wealthy was “on the table.”

“If it’s proper, if it can be worked in proper balance between the capital gains tax rate and income tax changes, fine.”

Staff writer Tom Redburn contributed to this story.

BACK TO WORK: Federal workers warily return to jobs across the Southland as budget talks continue. B8