Budget Negotiators Hit Another Snag on Taxes : Deficit: Specifics of proposed hikes for upper-income taxpayers meet opposition. But conferees are hopeful.

Senate and House conferees began ironing out final details of a new deficit reduction package Thursday, hoping to send the measure to President Bush for his signature by the end of this week. But the proposal hit another last-minute snag.

The package, embraced informally by House Democrats on Wednesday, was supposed to have sailed through both houses. The House Democrats had been the largest bloc opposed to previous plans. Their endorsement of the new plan was taken as a sign that a compromise was at hand.

But the effort ran into difficulty again Thursday as Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) and other senators objected to specifics of proposed tax increases on upper-income Americans, renewing the bargaining between the Senate and the House.

Although leaders on both sides still are hopeful that Congress will be able to complete a budget package by the weekend, it was clear Thursday night that the dispute will require another day--or possibly two--to resolve.

Senate members of a conference committee sent their House counterparts a new proposal late Thursday offering to change provisions in the House plan for increasing taxes on the rich. They also proposed that gasoline taxes be raised another 2 cents if oil prices rise.

In particular, the senators objected to a provision in the House plan dubbed the “family tax,” which raises the top tax rate by half a percentage point for each personal exemption claimed on a high-income return.

They also differed over another provision that would disallow $300 in deductions for every $10,000 in gross income above $100,000 for single taxpayers or $150,000 for couples--a move that would raise the marginal tax rates for those affected by 0.9%.

Thursday night, Senate negotiators proposed increasing tax rates by a full percentage point for each $2,500 of adjusted gross income above $100,000 for single taxpayers and $150,000 for joint filers.

They also proposed disallowing itemized deductions equal to 4% of a taxpayer’s adjusted gross income in excess of $125,000 a year. The House has a similar provision.

It was not immediately clear how the bargaining would turn out, but congressional strategists seemed confident Thursday that the two houses would be able to agree on a compromise budget by the end of this week. Such wrangling occurs often before adjournment.

Bentsen and House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) began meeting privately late Thursday in an effort to work out a compromise tax package. Rostenkowski said he hopes to reach an agreement quickly on two-thirds of the package.

House and Senate leaders said they had encountered increased pressure on negotiators to reach a compromise because lawmakers want to hit the campaign trail during the last 10 days before Election Day.

Although disputes continued over other parts of the package--including oil drilling tax breaks and other business tax incentives--the major components appeared to have enough support to pass both chambers as one of the last acts of the stormy 101st Congress.

Even while negotiators scurried around the Capitol, however, a jogging Bush told reporters that he was “feeling good” about the five-year agreement that has caused him so much political pain.

“The President does believe this budget report is a historic bipartisan agreement,” White House Press Secretary Marlin Fitzwater said. “Although the process has been somewhat tortuous, we can believe there has been solid achievement.”

On Capitol Hill, most Democrats exulted over the still-tentative accord and said it was far more fair to middle-income and lower-income taxpayers than the budget plan worked out by White House officials and congressional leaders, then defeated by the House Oct. 5.

“It’s about as good as we can do,” Rep. Howard L. Berman (D-Panorama City) said. “It’s far more progressive, less onerous on the middle class and it’s not trying to reduce the deficit on the backs of the elderly.”

One factor that appeared to be holding up quicker action on the package was the sheer complexity of some of the provisions. Many lawmakers continued to complain Thursday that they still did not understand some of the proposals and there were few documents to explain them.

Democratic strategists said they anticipate enough support from their 258 House members, combined with some GOP votes, to pass the package without great difficulty. Republicans predicted that about 50 to 60 of their number will support the plan.

“They recognize there isn’t another door to choose from,” Rep. Jack Buechner (R-Mo.) said. “The only other door is to shut the government down--the constituents won’t accept that.”

The newest part of the package--dubbed PEP, for personal exemption phase-out--puzzled many members of Congress. Some quickly labeled it the “family tax” because it appeared to punish upper-income people with large numbers of dependents.

The bill would gradually take back from the well-to-do the tax savings from personal exemptions, which are set at $2,050 this year. The effect would be to boost the top tax rate on these taxpayers by half a percentage point for each exemption.

Once a single person’s taxable income (after exemptions and deductions) rose to more than $100,000, for example, he or she would pay at a 31.5% rate. The value of exemptions would be phased out completely at the $225,000 level.

For couples with no children, the benefit would be phased out between $150,000 and $275,000 of income. At that point, they would be paying 33%.

Another controversial change would limit certain itemized deductions for individuals with incomes of more than $100,000 and couples with incomes of more than $150,000.

For each $10,000 in income above the cutoff level, the proposal would reduce allowable deductions by $300, or 3%.

The new plan would cap the tax rate for capital gains--profits from the sale of stocks or other assets--at 28%. Under current law, capital gains are treated as ordinary income, and taxpayers pay anywhere from 28% to 33%.

Meanwhile, key lawmakers said a new $2.5-billion child care program will be incorporated in the omnibus budget package as well.

Under the program, block grants to states will provide direct assistance to low-income families as well as support to schools and community agencies that provide child care.

Sen. Christopher J. Dodd (D-Conn.) said House leaders had agreed to the three-year compromise program negotiated by senators and Administration officials earlier this month.

Dodd said assistance could be provided for 750,000 children in the first year. Part of the funds would go for early childhood education and “latchkey” after-school care in schools or at facilities run by community groups.

In a related action, the Senate approved, 60 to 36, the 1990 farm bill and sent the legislation to Bush. The bill would cut crop subsidy payments in line with the deficit reduction agreement.

The five-year, $40.8-billion farm measure had been approved by the House on Tuesday, 318 to 102. The legislation would reduce subsidized acreage by 15% to meet a target of $13 billion in farm subsidy reductions over the next five years. It also would require farmers to keep records of hazardous pesticide use and authorize the first effort to assess the threat of global climate change on agriculture.

A provision in the original Senate bill that would have prohibited export sales of pesticides banned or unregistered in the United States was dropped from the final version of the bill. Among other things, the measure would establish a program for protecting 25 million acres of private forest land and create national standards for organic farming.

Although the deficit reduction plan embraced by House Democrats would scrap a proposed surtax on millionaires that some liberals had wanted, it would place a high burden on people with incomes of $200,000 or more.

Except for higher excise taxes on gasoline, cigarettes, alcoholic beverages and airline tickets, people with earnings of less than $50,000 generally would be spared additional income tax hikes.

Still to be worked out, however, are details of a roughly $13-billion expansion of the earned income tax credit. The money would go to low-income working families with children but would not be tied directly to child care expenses.

Some legislators also were seeking an additional program of child care assistance for poor families that would become an entitlement program under Title 4 of the Social Security Act.

The price tag on that would be $1.5 billion over five years. Rep. Thomas J. Downey (D-N.Y.) said the money could come from scaling back the earned income tax credit.

And, on a related issue, tax writers remained split over whether to make the existing dependent care tax credit “refundable” and thus available to those with incomes too low to take advantage of the credit.

The gasoline tax issue is particularly sensitive in California because the state already is boosting gasoline taxes by 5 cents a gallon with additional 1-cent increases scheduled at the first of each year through 1994.

Here are the major tax provisions of the compromise that House Democrats proposed:

--An increase of 5 cents a gallon in the existing 9-cent federal gasoline tax.

--Two 4-cent increases in the 16-cent-a-pack tax on cigarettes. The first would take effect Jan. 1 and the second would be imposed two years later.

--A doubling of the 16-cent tax on a six-pack of beer, a 25-cent tax on a bottle of table wine and an increase of $1.50, or perhaps slightly more, on a proof gallon of liquor.

--A rise in the airline ticket tax from 8% to 10%.

--A luxury tax of 10% on very high-priced automobiles, yachts, planes, jewels and furs. The tax would apply only to the price of cars above $30,000 and furs above $10,000.

--An increase in the 1.45% health insurance payroll tax by applying it to the first $125,000 of earnings rather than the current ceiling of $51,300.

--A new top-bracket rate of 31%, which would be a tax increase for an estimated 600,000 people with incomes of more than $200,000 a year but a cut in tax rates for about 3.5 million others now in the so-called “tax bubble” ranging from about $80,000 to $188,000 for a couple.

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THE BUDGET DEAL Spending Cuts MEDICARE: Reduce outlays by increasing Part B deductible, now $75, to $100 in 1991. Curb Medicare payments to hospitals and doctors by about $30 billion over the next five years. DEFENSE: Cut Pentagon spending by as much as $185 billion over five years. AGRICULTURE: Cut farm subsidies by $13 billion over the next five years. DOMESTIC: Allow some spending increases this year. Hold growth in domestic spending programs to rate of inflation for next three years. Revenue Raisers UPPER-INCOME TAXPAYERS Raise the official income-tax rate for taxpayers in the highest income brackets to 31% from 28%. Some taxpayers who currently pay marginal rates of 33% would receive a rate-cut to 31%. Create another tax “bubble” by phasing out the personal exemption, now $2,050 per person, for affluent taxpayers. This would be done by raising the top tax rate by 0.5% for each exemption on incomes between $150,000 and $275,000 for couples and families, and between $100,000 and $225,000 for singles. Disallow $300 in deductions for every $10,000 in gross income above $150,000 for couples or $100,000 for singles, raising marginal tax rates for those affected by about 0.9% CAPITAL GAINS: Cap the maximum capital gains tax rate at 28%, instead of current maximum of 33%. MEDICARE: Extend 1.45% Medicare payroll tax to wages up to $125,000 from current $51,300 ceiling. Adjust Part B premium to cover 25% of program costs, rising from $28.60 a month this year to a projected $46.50 in 1995. GASOLINE: Boost the federal gas tax, now 9 cents a gallon, by 5 cents. TOBACCO: Increase the current 16-cent-a-pack cigarette tax by 4 cents in 1991 and another 4 cents in 1993. ALCOHOL: Raise the liquor tax by $1.20 a proof gallon. Boost the beer tax by 16 cents a six-pack. Increase the table wine tax by 22 cents a bottle. LUXURIES: Impose a new 10% tax on the price above $30,000 for cars, $100,000 for boats, $5,000 for jewelry, $10,000 for furs and $250,000 for planes. LOW INCOME TAX BREAKS: Increase earned-income tax credit for working poor by $13 billion over five years. OTHER TAXES: Impose a new “gas-guzzler” tax on cars whose gasoline mileage is less than 15 m.p.g. Increase airline ticket tax to 10% from 8%. Impose Social Security and Medicare payroll tax on state and local government workers beginning in 1991. BUSINESS TAX: Offer new tax incentives for oil and gas exploration if oil prices fall below $34 a barrel. Deny corporate deduction for interest paid on tax underpayments. Increase tax for insurers. Increase railroad retirement payroll tax. Renew expiring tax credits through end of next year, include credit for research and development, health insurance for self-employed and low-income housing.