Federal Shutdown Averted as Senate Nears Budget OK : Deficit: The plan is endorsed by the President, who will sign a stopgap spending bill if progress continues. The package must be reconciled with a House version.

A threatened weekend shutdown of the federal government was averted Thursday as the Senate neared approval of a $500-billion deficit-cutting package endorsed by President Bush and moved toward negotiations with the House on a new compromise plan.

The White House sent word to Capitol Hill that the President would sign a stopgap resolution to continue federal spending into next week as long as the lawmakers were making satisfactory progress in the final stage of the deficit reduction talks. Congressional leaders said a new continuing resolution would assure government operations at least through next Wednesday.

Senate action on its budget legislation would open what may be the final stage of the 5-month-old effort to reach an agreement between the Bush Administration and the Democrat-controlled Congress on slashing the deficit.

Meantime, the President renewed his warning that he would not accept the House Democratic bill because, he said, it would raise income tax rates in ways that would “sock it to the middle class and working people of this country.”

Appearing before White House interns, Bush defended himself against Democratic arguments that he is trying to protect the wealthiest Americans by resisting tax rate boosts.

“When tax rates get too high . . . there is no incentive to save or to invest,” the President said. “When some members of Congress talk about ‘soaking the rich,’ they really do mean raising taxes on everybody.”

House Democrats, however, said inclusion of the gas tax increase in the Senate bill would mean far higher tax hikes for middle-income and lower-income Americans than the House-approved decision to skip inflation indexing for income taxes in 1991.

The focus shifted Thursday night from the House and Senate, however, to the uncertain prospects for a Senate-House accord that the President would sign, thereby avoiding an impasse that would lead to a shutdown of federal services and furloughs for up to 1 million U.S. employees.

Democratic and Republican leaders of the Senate successfully stiff-armed attempts to alter the measure approved by its Finance Committee during daylong debate on the unprecedented election year combination of spending cuts and tax increases.

The bipartisan Senate bill would raise gasoline taxes by 9.5 cents a gallon, limit deductions for those making more than $100,000 a year and apply the 1.45% health insurance payroll tax to the first $89,000 of earnings each year instead of the $51,300 ceiling now in effect.

In contrast, the House-approved bill would raise the top tax rate to 33%, impose a 10% surtax on taxable income of more than $1 million and raise almost everyone’s taxes by delaying by one year inflation adjustments of tax brackets and personal exemptions. It also contains a reduction in capital gains tax rates, designed mainly for people with incomes of less than $100,000 a year. It would retain federal gasoline taxes at the current 9 cents a gallon. Both bills would raise taxes on beer, wine, hard liquor and cigarettes and impose a luxury tax on the most expensive cars, yachts, private planes, furs and jewelry.

Both also would make a wide variety of spending reductions for farm subsidies, veterans’ benefits, federal lump-sum retirement payments and other government services, while raising dozens of user fees and penalties for violations of federal laws.

The Senate rejected several attempts to raise top-bracket income tax rates, soften the impact of Medicare cuts on the elderly and enact a 10% surtax on those earning $1 million or more a year.

Majority Leader George J. Mitchell (D-Me.), who said he agreed with many of the proposals, argued that their passage would certainly lead to a Bush veto of the legislation and therefore should be defeated to avoid a continued deadlock between Congress and the White House.

Sen. Lloyd Bentsen (D-Tex.), chairman of the Finance Committee, said he personally favors an increase in top tax rates but he strongly opposed efforts to revise the bill, approved by a 15-5 vote of his committee with bipartisan backing.

But Bentsen indicated that he would seek during Senate-House bargaining to reconcile the two measures to place a greater burden on the wealthy than the Senate bill provides.

“Let us go to conference and pick the best of each” of the Senate and House bills, “and put together a package that Democrats and Republicans can get behind,” Bentsen said. “That has to mean an increase in progressivity as far as I am concerned--it will be the objective.”

The Senate narrowly rejected, 51 to 49, an attempt to adopt the House-passed “millionaires’ surtax” and use the revenue to eliminate a proposed increase in the deductible for doctor bills paid by Medicare beneficiaries. Under the rules for consideration of the budget act, however, it would have required 60 votes to pass the amendment introduced by Sen. Tom Harkin (D-Iowa).

Another plan to raise the top income tax rate to 33%, cut the proposed gas tax increase to 6 cents a gallon and soften the bill’s impact on Medicare patients was rejected, 55 to 45.

Sen. David L. Boren (D-Okla.) tried but failed to include a trade-off between lower capital gains rates for long-held assets and a 33% top rate. He lost, 57 to 42.

On each of the so-called “deal busters,” Mitchell, Minority Leader Bob Dole (R-Kan.) and their lieutenants combined forces to block major changes in the committee package.

“We’ve got to get this job done,” Mitchell thundered at one point. “Do we want to make a statement or do we want to make a law?”

The senators, who each had a foot-high copy of the 1,064-page budget reconciliation bill on their desks, began the debate in midmorning and continued late into the evening on what for them was an extremely fast track.

Overall, the Senate bill would cut the deficit by $28.4 billion in this fiscal year and by $252.5 billion over the next five years. Additional cuts in appropriations, mainly for defense, would trim red-ink spending by another $12 billion in the next year and by $180 billion between now and 1995. Savings in interest payments on the debt would make up the balance of the $500-billion package.

Meanwhile, Rep. Jamie L. Whitten (D-Miss.), chairman of the House Appropriations Committee, introduced at the request of Democratic leaders another resolution to continue spending from Friday midnight through Wednesday to prevent a shutdown of the government. The measure passed on a vote of 379 to 37 and was sent to the Senate, where approval was expected today. “The leadership has been advised that the President will agree to such an extension,” Whitten announced.

Without the continuing resolution, massive spending cuts of $85.3 billion would be imposed, Whitten said, amounting to a one-third reduction that he said would be catastrophic.

Staff writer David Lauter contributed to this story.

BUDGET PLAN IN DETAIL: A wide range of little-publicized measures make up the spending package. A20