White House Flatly Rejects Latest Democratic Tax Plan : Budget: President, Congress head for new showdown. Sununu says another government shutdown is likely.

As President Bush and Congress headed for another showdown over the budget this week, Administration officials Sunday flatly rejected a House Democratic deficit-reduction plan and declined to throw full support behind a bipartisan alternative in the Senate.

Anticipating no quick solution to the impasse, White House Chief of Staff John H. Sununu predicted the “odds are relatively high” that the federal government will shut down again at midnight Friday, when the government’s current spending authority expires.

Both the Senate and the House are expected to vote by midweek on differing budget packages designed to avert another government shutdown and cut the deficit by raising taxes and reducing spending. After that, a House-Senate conference committee must try to resolve the enormous differences in the two proposals before sending a bill to the President.

Despite the time pressures created by the Friday deadline, Sununu said that the President will not unveil his own recommendations for a new budget package until both the House and Senate have acted on their proposals and the conference committee has convened.

This showdown comes at a time when Bush’s popularity ratings have dropped dramatically and the economy is suffering from rising prices at the same time that it appears to be on the brink of recession.

The task of finding a compromise also will be more difficult because midterm elections are only three weeks away and Congress is being asked to approve the largest tax increase in history as part of an unprecedented effort to slash the deficit by a half-trillion dollars over the next five years.

Failure to approve a budget plan, however, would further shake confidence in the dollar and stall any reduction in interest rates that might result.

Appearing on NBC-TV’s “Meet the Press,” Sununu said that Congress is to blame for the crisis because the House two weeks ago rejected a budget agreement endorsed by the President and Senate and House leaders of both parties.

“The American public does realize that it is Congress’ muddling around and trying to avoid a vote right now that’s creating a great deal of the difficulty,” he said.

In response, Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, charged on ABC-TV’s “This Week with David Brinkley” that it was the President who had set back the budget process last week by “changing his mind several times” on what kind of budget pact he would accept.

Both Sununu and Vice President Dan Quayle condemned a proposal backed by the House Democratic leadership that would raise taxes sharply on upper-income Americans, provide a tax break for middle-income investors and avoid any increase in the gasoline tax.

Quayle, on CBS-TV’s “Face the Nation,” complained that the House Democratic plan would raise taxes on all Americans, no matter what their income level, because it delays for one year the scheduled inflation adjustment of tax brackets and personal exemptions.

“We are violently opposed to that Democratic plan,” Quayle said. “A family of four at $35,000 will pay an additional $270 of taxes a year.”

Sununu added: “A bad solution will not improve the economy.”

At the same time, Sununu gave only lukewarm support to a $500-billion deficit-cutting package approved by the Senate Finance Committee, which has the backing of both Senate Majority Leader George J. Mitchell (D-Me.) and Minority Leader Bob Dole (R-Kan.).

“It’s a much better reference point for reconciliation than the House package,” Sununu said. “But we believe . . . it can be brought even closer to the summit agreement and that package would be acceptable.”

While Sununu still admires the pact worked out by White House and congressional negotiators--but rejected by the House--both Democrats and Republicans in Congress agree that it must be modified to cushion the impact on Medicare beneficiaries and lower the impact of tax increases on middle-income and lower-income groups to stand a chance of passage.

As a result, the current Senate proposal would limit the amount of deductions that taxpayers with incomes of $100,000 or more can use to reduce their taxes, which would raise $29 billion over the next five years.

The Senate package, approved 15 to 5 by a combination of nine Democrats and six Republicans on the Finance Committee, also includes a 9.5-cent-a-gallon increase in the gasoline tax that has attracted nearly universal opposition in the House. Instead of raising Medicare beneficiaries’ payments by more than $28 billion over the next five years as the rejected agreement proposed, however, it would lower the increase to $18 billion between now and 1995.

The Finance Committee also agreed to apply the 1.45% payroll tax for Medicare on the first $89,000 of wages or salaries each year, instead of the current ceiling of $51,300. The House Democrats would apply the tax to the first $100,000 of pay.

Senate leaders have agreed to defend the Finance Committee plan when debate begins, probably on Tuesday. But Bentsen acknowledged that he expects “politically appealing” amendments to be offered that would be hard for senators to resist.

Sen. Donald W. Riegle Jr. (D-Mich.), for example, has said that he will propose a 10% surtax on persons with more than $1 million in taxable income and use the additional revenue to cushion further the impact of the budget accord on Medicare recipients. A similar so-called “millionaires’ surtax” already in the House package would raise more than $7 billion over the next five years.

In the House, Republicans are split on whether to offer an alternative package or just fight the Democratic plan. Speaker Thomas S. Foley (D-Wash.) has said that the chances are good for approval of the package put together by House Ways and Means Chairman Dan Rostenkowski (D-Ill.) that puts the greatest tax burden on upper-income groups. Rostenkowski, appearing on CNN’s “Newsmaker Sunday,” said that he would insist on a top tax rate of 33% as part of any budget agreement.

“I’m not in cement about anything,” Rostenkowski said. “There are certain things that I think are necessary, and that certainly is the (top) rate of 33%. I believe that Americans in the upper-income brackets should shoulder their responsibility just like those of us in the lower-income brackets.”

Under the current stopgap spending law approved by Congress and signed by the President, the government can continue spending until 12:01 a.m. Saturday. Unless this spending authority is renewed, all but essential federal services would halt and most of the 2 million U.S. government employees would be furloughed without pay.