Deficit-Reduction Bill Rife With Favoritism : Budget: Lawmakers continue to fund pet projects and provide tax breaks for home-state industries.

Taxes on a bottle of wine will go up 700% when the new federal budget plan is signed into law--unless the wine was produced in Oregon.

A provision of the tax bill passed by Congress over the weekend exempts small wineries from the increase and, to the consternation of many Californians, the definition of small happens to fit all 85 wineries in Oregon. That is the home state of Sen. Bob Packwood, the top Republican on the Senate tax-writing committee and the sponsor of the exemption.

Along similar lines, Lehigh University has spent three years looking for money to build a naval research center. Its ship came in last weekend when Congress voted to give the Pennsylvania college $24 million for the facility.

The public, and most members of Congress, would have a hard time explaining what the $24 million was all about. It was buried in an obscure amendment that did not even mention Lehigh. Instead, the money is earmarked for Competitive Technologies Inc., which a congressional staff member called “nothing more than a paper, dummy organization.”

Similar breaks that slipped through Congress in the waning hours of last week’s session benefit everything from makers of large cigars to wealthy art patrons to a small theater in West Virginia and manufacturers of ethanol, a gasoline substitute.

Despite the contention by some lawmakers that they and their aides kept the special breaks to a minimum this time around, the new federal budget is rife with examples of favoritism that appear to counter the spirit of the deficit-reduction package.

Sen. Sam Nunn (D-Ga.), chairman of the Senate Armed Services Committee, already has vowed to investigate actions by lawmakers that added tens of millions of dollars worth of special projects to the defense appropriation bill.

Rep. Curt Weldon (R-Pa.) has even offered to buy lunch at a Capitol Hill restaurant for any of his colleagues who spot new examples of this dubious but time-honored practice.

The special breaks were passed despite the pressure on Congress this year to come up with a budget that slashed the deficit by $500 billion--and despite the insistence of congressional tax-writers that the new bill was free of the sort of breaks that the 1986 tax act contained.

“I haven’t seen anything at the level of outrageousness of the 1986 act, but I wouldn’t chalk it up to a sudden feeling of reform in the tax-writing committees,” said David L. Keating, executive vice president of the nonpartisan National Taxpayers Union here.

“They were simply scratching for every last dollar to meet this deficit-reduction goal, and special breaks stood in the way,” Keating said.

Even in the current atmosphere, however, the 13 appropriations bills and other legislation approved by Congress in the waning hours of the session this last weekend contain hundreds of millions of dollars worth of special-interest measures, such as the small-winery exemption.

From the start of the budget negotiations, one of the major revenue raisers was expected to be a sharp increase in the taxes on alcoholic beverages.

In early September, members of the Oregon Winegrowers’ Assn. met with Packwood to complain that a big tax increase would doom many of the state’s small wineries, said Bill Nelson, the group’s executive director.

Nelson said that it was Packwood who suggested exempting the small wineries. The growers’ group then suggested that operations producing less than 250,000 gallons of wine a year should be protected.

As the ranking Republican on the Senate Finance Committee and a member of the House-Senate committee that worked out the final details of the package, Packwood was in a position to deliver for his constituents.

When the final package was approved, the tax on a bottle of table wine shot up to 21 cents, from 3 cents. But wineries producing less than 150,000 gallons a year were exempted from the increase entirely, and those producing 150,000 to 250,000 gallons got a partial exemption.

The staff of the Joint Committee on Taxation estimates that, over the five-year period covered by the bill, the exemption will save the wineries $500 million.

In a statement, Packwood called the exemption “a victory for Oregon’s wineries.” And Nelson said Monday that the majority of California wineries also will benefit because about 600 of the states 650 commercial wineries produced less than 250,000 gallons a year.

However, those 600 California wineries account for only about 3% of the 412 million gallons of wine produced annually. The big California winemakers, such as E&J; Gallo Winery, Robert Mondavi Winery and Fetzer Vineyards, will be hurt by the new tax.

New tobacco taxes were another key revenue-raiser--and another area where a key congressional tax-writer protected a home-state industry.

Rep. Sam Gibbons (D-Fla.), a long-time member of the House Ways and Mean Committee, ushered a provision through the negotiations that will reduce taxes on tobacco manufacturers who produce “large” cigars--those weighing more than three pounds per 1,000, or .04 ounces each.

The cigar manufacturers in Gibbons’ district, all of whom fall into this category, are expected to save more than $100 million over the next five years as a result of his efforts.

But Gibbons insisted that the provision is only a “technical modification” that “does not seek to exempt manufacturers of large cigars from paying federal excise taxes nor from having their tax rates increased.”

Senate Minority Leader Bob Dole (R-Kan.) protected two of his constituencies.

Although luxury items, such as personal aircraft, will be subject to higher taxes, Dole managed to raise the price threshold to soften the blow to two of the nation’s largest manufacturers of small aircraft, Cessna and Beech Aircraft, both situated in Kansas.

And, although gasoline taxes are to rise, he managed to extend a tax break for those who manufacture or mix low-emission ethanol additives for gasoline.

“Ethanol is a fuel made from grain, and, since we represent a state that is grain-producing, we have an interest in creating markets for grain,” a Dole staff member explained.

A major beneficiary of the tax break will be Archer-Daniels-Midland, the huge agribusiness firm that is the nation’s largest ethanol producer. ADM chief executive Dwayne Andreas is a big Republican campaign donor.

Senate Majority Leader George J. Mitchell (D-Me.) did not fare as well in trying to obtain a favorable tax rate for companies selling a specific type of insurance, including a firm in his hometown of Portland.

Mitchell’s proposal, which would have resulted in an additional $1 billion in lost revenue, was dropped after complaints that it looked bad, according to budget staff members.

Along with the tax breaks, Congress managed to tuck a number of late spending projects into the budget, much to the anger of Sam Nunn, who has vowed to call hearings early next year on additions to the defense appropriations bill.

One of those projects was Lehigh’s $24-million research center. Michael Bolton, Lehigh’s vice president for development and university relations, defended the project Monday and said that it was widely supported by Pennsylvania’s congressional delegation.

The United States, he noted, has been without a real funding program for building new research facilities for more than two decades.

It is because of the absence of a federal funding program for new facilities that “Lehigh and others try to make our needs known to our congressional delegation,” Bolton said. “We have no other place to go.”

But that tactic, known as “earmarking,” has become increasingly controversial, not only in Congress but among universities and the science community at large.

Critics of the practice, which began to develop in the early 1980s, say that funding for all research projects, whether specific research projects or new facilities, should be on a competitive basis, in which scientists openly review the proposals of their peers.

Nunn attacked the practice on the Senate floor Saturday, citing numerous examples in the defense appropriations bill.

“I am anxious to learn why the Navy’s existing laboratories and design bureaus are so limited that we must add $24 million for a nonprofit consortium formed by Lehigh University to study shipbuilding design and manufacturing methods,” Nunn said.

In all, the Bush Administration had requested $98 million for competitive research grants. But the House added $60 million in special projects. Among them:

--$10 million for a new lab at Drake University in Des Moines, Iowa, for pain research.

--$10 million to create a National Drug Intelligence Center in the home district of Rep. John P. Murtha (D-Pa.), chairman of the House Appropriations defense subcommittee.

--$4 million for a Japanese-American Museum as a part of the proposed cultural center in Ontario, Ore.

--$5 million to build a new parliament building in the Solomon Islands, an independent nation.

--$3.5 million for the Center for Advanced Information and Resource Management Studies, a new computer building, at Loyola College in Baltimore, Md.

Without identifying the specific projects, Nunn said that at least seven of the earmarked appropriations involve “first-time grants to colleges and universities for activities no one in the Department of Defense has requested.”

“The conference report didn’t even discuss the purpose of most of these projects,” Nunn fumed.

Staff writers Maura Reynolds and Jennifer Toth contributed to this story.