Partisan Dispute Stalls Tax Talks : Budget: Republicans, Democrats deadlock over levies on the rich. White House officials angrily depart Capitol Hill. Negotiators for both sides later resume sessions.

Budget talks were virtually deadlocked Sunday night in a sharp partisan dispute over how to tax the rich, dashing hopes for a quick accord on a new plan to reduce the deficit.

Key Republicans, declaring the negotiations at an impasse, accused Democrats of refusing to budge in their demands for a surtax on very wealthy Americans and of stiff-arming a GOP counterproposal that would hit the rich by reducing deductions.

Democrats insisted that they would continue their effort to reach agreement on a $500-billion deficit-cutting package, despite the dramatic public blow-up and the angry departure from Capitol Hill of top White House officials involved in the bargaining.

John H. Sununu, the White House chief of staff, left Capitol Hill after discussions with Republican negotiators and charged that the Democrats were “negotiating with themselves” over tax policy.

“They got caught with their hands in the pocket of working men and women,” Sununu said of the Democrats. “They’ve got to figure out (today) how to work it out.”

Senate Majority Leader George J. Mitchell (D-Me.) said that Sununu is not taking a direct part in the negotiations and added: “The Democrats are unified.” Asked if the talks had collapsed, Mitchell replied: “No.” He added: “We’re disappointed that we haven’t reached agreement by now.”

Despite the harsh rhetoric from the Republican side, congressional negotiators from both parties assembled late Sunday night in the office of Senate Minority Leader Bob Dole (R-Kan.) for yet another try at a budget agreement.

While the gap was closing on Medicare cutbacks and the size of a gasoline tax increase, a few participants said that the politically charged issue of taxing upper-income individuals threatens to destroy chances for an agreement.

“These important negotiations have reached an impasse,” Dole said in a press release, blaming House Democrats for an unyielding stance.

With Congress moving into the final days of its session just two weeks ahead of the November elections, negotiators conceded that they would have little time to get a budget bill adopted unless negotiators break the stalemate today or Tuesday.

It also raised concerns about a new crisis at midnight Wednesday, when federal spending authority is scheduled to expire and a new government shutdown could occur.

President Bush expressed disappointment at the failure to make a deal by Sunday’s self-imposed deadline, according to Sen. Bob Packwood (R-Ore.), who talked to Bush by telephone.

“I’ve gone three-fourths of the way and I just don’t want to give up any more,” Bush was quoted by Packwood as saying.

Democrats said that the Republicans were seriously divided, with most House GOP lawmakers committed to opposing any tax increases and almost half the Senate Republicans voting against the plan endorsed by Bush.

At the heart of the dispute is how to make sure that wealthy persons pay an equitable share of taxes. Republicans have embraced a plan that would raise taxes for this affluent group by disallowing 4% of most deductions on income above $100,000, and by disallowing 8% of these deductions for persons with taxable income above $1 million.

This approach, known as the Pease plan for its chief advocate, Rep. Don J. Pease (D-Ohio), is opposed by many Democrats on grounds that it is a roundabout way of raising tax rates and could adversely affect residents of states like New York and California that have high state income tax rates.

Republicans, however, counter that their plan would raise more revenue than the Democrats’ plan. They add that it would be better tax policy because it would not affect rates set by the tax reform law of 1986 and thus would protect the tax code from being riddled with new loopholes.

Democrats in the budget talks have proposed a 10% surtax on taxable income above $1 million, along with other provisions to put more of the tax burden on those with incomes of more than $50,000.

House Majority Leader Richard A. Gephardt (D-Mo.) said that a surtax would have a uniform effect across the country, while any limits on deductions would have a disparate effect on citizens of various states.

Another Democratic aide said that any new plan must be closer to the House-approved measure, with its primary emphasis on taxing the rich, or it won’t be able to pass Congress.

“The White House just wants to take the old (defeated) budget summit agreement, dress it up and send it back to the floor,” the aide said. “We don’t think that will work.”

The clash overshadowed a possibly significant move toward a compromise when the Bush Administration indicated that it would accept an increase of up to 31% in the top-bracket rate if the budget package met all its other objections.

Democrats agreed to a 31% top rate but demanded that other provisions be included in the agreement. Their demands included the millionaires’ surtax, although they were willing to accept 7.5% rather than the 10% in the bill passed by the House, and application of the health insurance payroll tax to the first $140,000 of earnings a year instead of the current cap of $51,300. Democrats also asked for an increase from 21% to 23% in the alternative minimum tax--the tax on wealthy persons who have so many deductions that otherwise they would pay no tax.

In the past, the White House has linked the 31% rate to a trade-off for a lower capital gains tax. Democrats insisted that the top rate would have to rise to 33% before they would go along.

Under a quirk in current law whereby couples with incomes between $80,000 and $200,000 pay a marginal tax rate of 33%, about 2 million taxpayers would get a tax cut if the 31% rate was included in a budget package. Another 600,000 people with income above $200,000 who now pay a 28% marginal rate would pay higher taxes.

Overall, according to Packwood, adopting a 31% top rate would raise about $5 billion over the next five years.

“This is one of the all-time false issues, the rich-poor thing,” said Richard G. Darman, director of the White House Office of Management and Budget, on ABC-TV’s “This Week with David Brinkley.” He said that the compromise the White House supports would “tax the rich.”

Both sides hope to raise more money from upper-income groups to reduce the 9.5-cent-a-gallon gas tax increase in the Senate bill. Republicans proposed to slice the gas tax to about 7 cents, while Democrats favored a 5-cent boost.

On the politically sensitive topic of Medicare, both sides want to reduce the impact on the elderly from the Senate plan to cut spending in this area by about $49 billion. Republicans proposed a $47-billion reduction, while Democrats suggested $44.5 billion, with less impact on elderly beneficiaries.