Revolt in House Blocks Tax Plan : Budget: Democrats split over an agreement by negotiators on placing a levy on the wealthy.

Congressional efforts to draft a new budget package were thrown into disarray again Tuesday when House Democrats rebelled against a key part of a plan worked out by House and Senate negotiators, raising fears of another shutdown of the government at midnight tonight.

The controversy centered on how to tax the richest taxpayers--either by imposing a surtax on higher incomes, as most of the Democrats prefer, or by limiting deductions on those who earn $100,000 or more, as the Bush Administration insists.

Opponents of the Bush plan, which had been included in a package that House-Senate negotiators hammered out late Monday, said they feared that it would hurt high-tax states such as New York and California by crimping their revenues, but supporters denied the charge.

Leaders from both parties scrambled to repair the damage late Tuesday as members of House-Senate conference committees met sporadically to come up with an alternative that would satisfy both the House Democrats and others who took issue with the plan.

Senate Minority Leader Bob Dole (R-Kan.) and House Minority Leader Robert H. Michel (R-Ill.) went to the White House Tuesday night to report to President Bush on the budget talks.

As a result of the setback, Speaker Thomas S. Foley (D-Wash.) said that Congress might have to pass another stopgap resolution to renew federal spending authority and keep the government operating for another few days or weeks.

President Bush, who was campaigning in New England for Republican candidates, gave no indication of whether he would sign or veto a third stopgap extension.

The developments turned optimism into pessimism overnight about chances of getting a budget plan through Congress with Bush’s approval in the last two weeks before Election Day. Late Monday, negotiators on both sides were confident that they had an acceptable budget pact.

Sen. Wyche Fowler Jr. (D-Ga.), however, insisted that the near-deal could be salvaged, saying: “We are so close, it’s not going to slip away.”

But not everyone was as sanguine--or even willing to compromise.

In the House, some key Democrats discussed a more confrontational approach that would involve pushing through a budget package with the high-income surtax, trying to get it through the narrowly divided Senate and then letting Bush veto it.

But others cautioned that would not produce an agreement since there would be no way to override a veto in either chamber.

Speaker Foley denied reports that the Democratic leadership would try to ram through the House today a budget package containing provisions favored by Democrats and opposed by the Administration.

“We are still trying to work toward an agreement” with Republicans, Foley told reporters after a late-night meeting with other key Democrats.

The latest crisis began when House Democrats, meeting in caucus, found themselves evenly split over whether they could support a budget agreement without the 10% surtax on taxable incomes of $1 million or more that was included in the House-approved bill last week.

President Bush, however, insisted on an alternative method for hitting the wealthiest Americans by limiting deductions for those in upper income brackets, which his aides said would raise just as much revenue.

The Senate bill included a 5% cut in deductions for those with income above $100,000, while White House negotiators proposed an 8% reduction in deductions for taxpayers with income above $1 million.

Either provision would amount to a roundabout way to raise taxes on the rich without raising tax rates.

Since Bush must depend on a majority of House Democrats to get any budget bill approved in that chamber, party leaders in the House said that the budget plan should follow Democratic preferences on tax policy--especially since few House Republicans are expected to go along.

Republicans in both houses were livid over the Democrats’ rejection Tuesday of the budget package that negotiators had developed during the previous night.

“I thought we had an agreement last night (Monday),” said Sen. Pete V. Domenici (R-N.M.). “I don’t know what blew it up.”

Rep. Bill Frenzel (R-Minn.) appeared grim about prospects for reaching a new budget agreement and pushing it through Congress in the wake of Tuesday’s turnabout.

“It takes more than Herculean efforts--it takes a lot of luck, too, because it’s gone too far,” Frenzel said. “We’re in extremis --where you start pulling the siren and manning the lifeboats.”

Foley, however, said that he wants to resolve the dispute as soon as possible this week because delay would not help either party or the President.

Meanwhile, the President assailed the Democratic-controlled Congress and appealed to Republicans to support the emerging deficit-cutting plan during campaign appearances in Vermont and New Hampshire.

“Congress would not be in the mess it is today if we had more Republicans in the United States Congress,” Bush said at one stop. He also asserted that he had agreed to support tax increases only because of the need to compromise with Democrats on Capitol Hill.

“You know my feeling on taxes,” Bush said. “I like new taxes about as much as I like broccoli. I had to swallow hard.”

But Rep. Peter Smith (R-Vt.), one of a handful of Republicans who voted for both a previously rejected budget summit plan and the House-approved Democratic alternative to it, won applause from a GOP audience at a Burlington, Vt., breakfast when he took an opposing view.

“Higher taxes for the wealthy are . . . the only way to get this country out of deficit spending,” Smith said before introducing the President.

But both Republicans and Democrats from New York state joined to protest at the proposed limit on deductions, claiming that it was unfair to their state. “It’s a bullet with New York’s name on it,” complained Rep. Susan Molinari (R-N.Y.).

Rep. Don J. Pease (D-Ohio), who originated the reduction-of-deduction approach to get around Bush’s strong antipathy to raising tax rates, sent a letter to all members of Congress denying that it would affect high-tax states more than other states with lower taxes.

Rep. George E. Brown Jr. (D-Colton) said there was a feeling of frustration in the Democratic caucus over the repeated inability to reach an accord with Bush even on a surtax for millionaires and multimillionaires.

“The voters think we’re a bunch of jerks and they’re right,” said Brown.

As Congress met late into the evening in an effort to wrap up its business and adjourn for the year, budget meetings went late into the night on both sides of the Capitol.

White House Chief of Staff John H. Sununu came to discuss the latest snag with Dole. Earlier, Richard G. Darman, director of the White House Office of Management and Budget, met with House Democratic leaders.