Officials Face Dwindling Options for Dealing With Budget Impasse : Deficit: Significant actions are stymied by fears of voter backlash or a presidential veto. Few easy choices remain.

The federal budget fight now under way between Congress and the White House may look like a mindless quarrel, but the debate goes far deeper than that.

This week’s effort to construct a five-year, $500-billion deficit-reduction plan comes down to a handful of choices. And, in each case, the path is blocked by the fear of retaliation by angry voters or the fear of a veto by President Bush.

The problem the lawmakers face is that all of the easy budget-cutting options have been used up in previous years as officials in the White House and on Capitol Hill sought to reduce the deficit with as little political pain as possible.

Now, however, after years of fiscal foot-dragging by both branches of government, the arithmetic demands spending cuts or tax increases so big that they can no longer be achieved with fancy bookkeeping or the “smoke and mirrors” used so often before.

Instead, to obtain savings that are large enough to make a difference, budget-cutters will be forced to come to grips with such politically sensitive issues as cutting “entitlement” programs like Medicare that voters now seem to believe should be inviolate.

And, despite Bush’s earlier pledge of “no new taxes,” they will have to face the prospect of increasing revenues, either by raising income tax rates or by increasing other levies such as gasoline taxes, payroll taxes or taxes on alcohol and tobacco.

Indeed, the budget situation is so bad now that the odds are it will take all of the above and then some. To slash the deficit by $500 billion over the next five years, budget-makers figure they will need $350 billion in spending cuts and $150 billion in tax hikes.

But the pressures against such steps are formidable--and the election-year political risks are enormous--as the congressional leaders and top White House officials who negotiated the now-rejected bipartisan budget accord between May and late September have found.

For example, the deficit could have been reduced by $60 billion over five years by cutting Medicare benefits and slashing payments to hospitals and physicians, as proposed in the recent bipartisan pact. But the elderly protested, virtually toppling the deal all by themselves.

The agreement also sought to raise gasoline taxes by 10 cents a gallon, which would have raised $45 billion over the period. But that move sparked a backlash among middle-income voters, who already are paying higher gasoline prices because of the Persian Gulf crisis.

Some potential solutions are easy for lawmakers to make: They can tax the rich--those in the $100,000-and-up income brackets. Or they could impose a luxury tax on big-ticket items like yachts and limousines. Both actions are popular enough on their own.

But, although these may seem equitable to middle-income voters, none of them really raise much revenue, at least enough to make a serious dent in the budget deficit.

The reason is that, under America’s progressive tax system, most of the nation’s tax revenues are provided by middle-income wage-earners, who make up the bulk of the taxpayers both in number and in taxes paid.

Here are some of the choices--and the opposition to each:

--Raise tax rates for the rich, defined as those in the highest income tax brackets, to produce $57 billion in higher tax revenues over the five-year period of the accord.

House Democrats are trying to increase the top-bracket tax rate from 28% to 33%, boost an alternative minimum tax rate from 21% to 25% and impose a 10% surtax on taxable income of $1 million or more.

Opposition: Bush and virtually all Republicans are dead set against changing income tax rates, and the President has threatened a veto. The Senate Finance Committee proposed no increase in rates.

--Limit deductions for taxpayers earning $100,000 and up to produce $29.3 billion in added tax revenues.

The Senate Finance Committee adopted this back-door approach to raising taxes on the wealthy to meet Bush’s objections to a rate hike. Under a complex formula, it would take away $500 in deductions for every $10,000 of income over the $100,000 mark.

Opposition: House Democrats don’t like the indirect route, which is roughly equivalent to a 1.5% increase in the top tax rate. Also, this plan would indirectly limit a fraction of the deduction for mortgage interest payments--which real estate and housing interests regard as a bad precedent.

--Freeze inflation adjustments for one year to increase revenue $36 billion.

This complex part of the House package would raise income taxes effectively next year on all taxpayers by delaying scheduled increases in the personal exemption and the widening of brackets to prevent “bracket creep.”

Opposition: The Bush Administration is against this proposal, which Vice President Dan Quayle termed a “tax increase on middle America.” Quayle said it would raise taxes by $270 a year on a family of four with a $35,000 income.

--Raise gasoline taxes by 9.5 cents a gallon to bring in an additional $43 billion.

This unpopular tax increase is part of the Senate Finance Committee plan, supported by both GOP and Democratic leaders in the Senate as the major revenue-raising measure in their package.

Opposition: House Democrats as well as House Republicans--most of whom face the voters in three weeks--oppose it. So do the truckers’ lobby and other consumers of motor fuels.

--Increase the cost of Medicare insurance to the elderly.

The agreement backed by Bush and top congressional leaders that was defeated in the House on Oct. 5, for example, would have required a $30-billion contribution over five years from the nation’s 33 million Medicare beneficiaries, combined with a $30-billion cut in federal payments to Medicare providers such as hospitals and doctors.

This provision alone created such an instant backlash among the elderly, however, that it probably accounted for the stunning defeat of the plan in the House by a lopsided 254-179 vote.

At any rate, a substitute plan approved by the Senate Finance Committee would require Medicare participants to shoulder only $20 billion in additional costs over the next five years, and House Democrats went even further to appease the elderly, lowering the burden to $10 billion in their proposal.

To be sure, there are some easy choices.

With Bush observing from the sidelines for now, an intensive search is on for relatively painless sources of revenue, such as the instantly popular 10% “millionaires’ surtax” that would raise $7 billion to be used for reducing the burden on Medicare beneficiaries.

“That combines two of the sexiest things going--hit the rich and protect the old folks,” said one Senate aide. “Who could vote against that?”

Another easy mark, surprisingly, is the group of well-to-do Americans who earn from $50,000 to $100,000. They almost certainly will be required to pay an additional 1.45% health insurance payroll tax on all or part of their salaries above the current $51,300 cutoff point. Depending where the cap is placed, it could raise anywhere from $19.3 billion to $22 billion from these upper-middle-income people.

“They just don’t have the clout (to prevent it) and they don’t get any sympathy,” explained another congressional aide close to the budget process, noting that average family income is a little above $30,000 a year.

Even making the easy choices, however, leaves Congress with a long way to go.

The real fights will be over the taxes needed to raise about $100 billion more in the next five years and which groups will bear the biggest burden.

“It’s tough, from top to bottom,” said one budget negotiator.

House Speaker Thomas S. Foley (D-Wash.), who spent months helping to negotiate the original budget deal only to see it repudiated by the House, put it another way:

“If you think a budget summit is fun, you haven’t had much of the real kind.”

CUTTING THE DEFICIT: HARD CHOICES Proposals for cutting spending or raising taxes: MEDICARE Increase premiums paid by Medicare beneficiaries by $1.30 to $17.60 a month, and raise the amount of doctor bills they must pay out of their own pockets to $100 or $150 a year, from $75 now. Would cut deficit by: $30 billion Political reaction: Special-interest groups: Massive reaction by groups of elderly taxpayers, who deluged lawmakers with phone calls threatening to vote them out of office. Elderly voters contend they can’t afford a hike. Proposals for cutting spending or raising taxes: GASOLINE TAX Increase the federal gasoline tax by up to 9.5 cents a gallon from 9 cents a gallon now--following a sharp rise in gasoline prices since Aug. 1 Would cut deficit by: $43 billion Political reaction: Special-interest groups: Barrage of phone calls from voters in all categories complaining that a 10-cent-a-gallon rise--on top of recent price hikes--would be unbearable. Proposals for cutting spending or raising taxes: HEALTH Extend the 1.45% federal health insurance payroll tax now levied on the first $51,300 of a person’s income to apply it to the first $89,000 or $100,000, depending on the plan. Would cut deficit by: $22 billion Political reaction: Special-interest groups: No major backlash yet, but middle-income wage-earners seem likely to complain once the tax increases begin to bite. Proposals for cutting spending or raising taxes: INCOME TAX Eliminate the so-called tax “bubble” under which high-income taxpayers pay lower rates on their income taxes than those in the upper-middle income bracket--by raising the rate on the

top bracket to 33%, from 28% now. Bush opposes this. Would cut deficit by: $50 billion Political reaction: Special-interest groups: Upper-income taxpayers complain they are being singled out. Proposals for cutting spending or raising taxes: AVIATION TAX Increase taxes on airline tickets to 10%, from 8% now, and hike taxes on aviation Would cut deficit by: $12 billion Political reaction: Special-interest groups: Complaints from airline travelers.