Democrats Back New Tax Plan; Face-Off Likely

President Bush played a waiting game Friday as congressional Democrats endorsed a new deficit-reduction budget package, setting the stage for a bruising confrontation on the House floor next week.

Ignoring the President’s warnings against raising taxes on the rich, a caucus of House Democrats gave all-out support to a new proposal by their party’s majority on the Ways and Means Committee that would increase taxes for Americans in the highest income bracket.

The action came as Bush, facing another day of criticism in the wake of his wavering earlier this week on the tax issue and a GOP proposal for a cut in capital gains taxes, left for a weekend in Camp David, Md., leaving congressional Republicans divided and weak.

Critics continued to express doubts about whether Bush would be able to regain control of the budget issue again, with lawmakers now headed off on their own course. The two houses resume work on the budget issue on Monday.

The Democrats’ package would raise top-income tax rates to 33% from 28%, add a 10% surtax on people who earn $1 million or more of taxable income and raise taxes on beer, wine, hard liquor and cigarettes.

Under the plan, the amount of earnings on which taxpayers would have to pay the current 1.45% Social Security payroll tax--which finances the Medicare program--also would rise, to $100,000, from $51,300 now. That would mean that a taxpayer earning $100,000 a year would pay $706.15 more than he does now.

At the same time, Democrats on the Ways and Means panel approved a novel plan Friday that would allow individuals to reap up to $100,000 worth of capital gains in their lifetimes tax-free--excluding profits from the sale of stocks and bonds.

The proposal also would allow every American to escape taxes on up to $1,000 in capital gains on publicly traded securities every year. Capital gains are the profits from the sale of investments or other assets.

Panel Chairman Dan Rostenkowski (D-Ill.) said the new provisions added to the alternative Democratic tax package would benefit middle-income investors and spur economic growth.

Bush has already rejected both proposals, and House Republicans are too divided to offer much organized opposition.

Meanwhile, the Senate Finance Committee early today approved, on a 15-5 vote, a rival bipartisan budget package that would reduce the deficit by $142 billion over the next five years, mainly by increasing gasoline taxes by 9 1/2 cents a gallon and limiting deductions for taxpayers earning $100,000 a year or more.

The package, negotiated by top Democratic and Republican leaders, would scrap the 2-cent-a-gallon tax on home heating oil that was in the original budget accord that the House rejected last week, but retain tax increases on alcohol, tobacco and luxury goods.

The panel also would increase the amount of earnings on which wage earners must pay a 1.45% health insurance payroll tax to $89,000 from $51,300 now, a maximum annual increase of $546.65. The Senate committee plan also would raise airline ticket taxes from the present 8% to a new level of 10%, provide tax incentives for the oil industry and extend popular tax credits for research and development by business.

Friday’s developments virtually ensured a series of bitter battles next week--first on the House floor and later between the House and Senate and between Congress and the White House--before the current budget crisis is settled.

Congress is planning to recess at the end of next week so lawmakers can go home for autumn election campaigns. As things stand now, the two houses must approve a new spending plan by Friday or face another possible shutdown of the federal government.

The President, who kept a lower profile on budget issues Friday after days of confusing turnabouts, apparently is resting his hopes on a slightly revised version of the budget summit agreement that went down to defeat in the House a week ago.

“Just stay calm, and it’ll work out,” Bush said in one of his few public appearances, a picture-taking session a few hours before flying off to his Camp David, Md., hideaway for the weekend.

The Ways and Means proposal, in addition to higher taxes on upper-income taxpayers and increased alcohol and tobacco levies, includes these major elements:

--A novel plan that would allow individuals to reap a tax-free profit of up to $100,000 during their lifetimes on the sale of homes, farms, small businesses, timber and other assets except stocks and bonds.

--A tax-free capital gain of $1,000 every year for assets held for more than a year, including securities, if the taxpayer had annual earnings of up to $100,000. Partial benefits would be available for people with incomes of up to $150,000.

The proposal also would eliminate the entire 10-cent-a-gallon gasoline tax increase that had been contained in the original bipartisan budget package that was rejected last week by the House.

Democrats had approved a 3-cent-a-gallon levy on Thursday, but they withdrew it after opposition from the party caucus.

To compensate for the loss in expected new revenues, however, the new Democratic proposal would freeze for a year the current indexing of the personal exemption, now $2,100--a move that effectively would raise taxes by $18.5 billion over the next five years.

The White House rejected the plan, with Bush’s spokesman, Marlin Fitzwater, terming it “just another tax-and-spend effort to raise taxes by every means imaginable.”

But Rostenkowski predicted that the Democratic package would easily gain a majority when the House considers a $500-billion deficit-reduction bill next week.

“The key to creating a healthier economy lies in getting the average American to save and invest more,” Rostenkowski said. “We know that throwing a tax cut at rich Americans will only achieve one goal--it will make them richer. That isn’t economic growth.”

House Republicans also caucused Friday, but failed to agree on an alternative tax package. A sizable number of GOP lawmakers said they preferred not to advocate any deficit-cutting plan that included tax increases of any kind.

The House Republican Policy Committee had recommended a reduction of the capital gains tax rate to 15% and an increase in the top-income rate from 28% to 31%--a trade-off that Bush both embraced and later opposed on Thursday.

His on-again, off-again stand alienated GOP supporters of the plan, who decided to proceed on their own without following the President’s lead on budget policy. As Rep. Bill Frenzel (R-Minn.) said of his Republican colleagues, their attitude toward Bush was “cut and run.”

Still, Bush’s influence may be felt more in the Senate, where efforts to reach a bipartisan consensus on a deficit-cutting plan continued behind closed doors.

Because of the narrow Democratic majority in the Senate, cooperation across party lines is essential to push controversial legislation through. By contrast, in the House, Democrats hold a 258-176 advantage and have tighter control over scheduling.

Any deficit-reduction plan that the House passes next week would have to be reconciled with a Senate version and then approved by both chambers before it would be sent to the President for his approval.

PRICES JUMP: Oil costs are blamed as producer prices increase 1.6%. A2

CAPITAL GAINS: Economists are as divided as the politicians on what benefits, if any, would result from cutting the tax on capital gains. D1

A SCORECARD FOR THE BUDGET MESS

President Bush House Democrats House Republicans Capital gains Wants tax rate cut Would allow up to Some favor rate cuts to 15%, from 28% $100,000 in untaxed to 15%. Others would now. lifetime capital gains, settle for 20%. plus up to $1,000 per year in stock profits. Income tax Wants to leave Would increase top Some want to leave existing rates rate to 33% from 28%, rates unchanged. unchanged. impose 10% surtax on Others would raise incomes over $1 million, top rate to 31%, from and delay inflation 28%. indexing for one year. Medicare Proposes increasing Would raise premiums No official position, monthly premiums to to $29.90 in 1991, but favor reducing $54.30 from $28.60 rising to $46.20 in impact on Medicare and increasing 1995, and boost beneficiaries. yearly deductible deductible to $100. to $150 from $75. Gasoline tax Wants to increase to Propose no change. Virtually all favor 19 cents per gallon no change. from 9 cents now. Health insurance payroll tax Proposes applying Senate would apply No official position. 1.45% tax to first 1.45% tax to first $73,000, from the $89,000, from the current $51,300 a current $51,300. year. House plan would raise this to $100,000.