Bush Doesn’t Favor Tax Cut This Year : Economy: Budget Director Darman says such a move would produce ‘partisan conflict’ and upset financial markets.

Accusing the Democratic-led Congress of inaction on several Administration proposals that would aid the sluggish economy, White House Budget Director Richard G. Darman said Monday that President Bush will not advocate passage of a tax cut this year because it would produce only “partisan conflict” and upset financial markets.

But Darman said the President would push for tax relief for middle-income Americans and investors next year if a recovery fails to pick up steam in coming months.

His remarks at a luncheon meeting with reporters appeared to squelch efforts by some Republican members of Congress and Housing Secretary Jack Kemp to get Bush’s backing for an immediate all-out push for tax reduction to stimulate growth.

At the same time, Darman attempted to shift the blame to Democrats for Bush’s decision to delay--for now, at least--any attempt to propose new steps to revive the economy in the closing days of the first session of the 101st Congress. The President made similar statements last week in Texas, when he charged that Democrats are undercutting his domestic programs.

Many Democrats have argued strongly for a tax cut focused on middle-income persons but appear unlikely to proceed with tax legislation this year in view of strong opposition by Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee.

The Administration’s stand drew criticism from Sen. Phil Gramm (R-Tex.), a leading GOP advocate of enacting a tax-cut package this year.

“This recession is going to pass, but we can make it pass quicker if we do something,” Gramm told another group of reporters. “The President is afraid the Democrats would take whatever package we had and rip it apart and turn it into an anti-growth tax package. . . . The odds are against the White House doing anything (this year).”

With Congress likely to adjourn by Thanksgiving Day, Darman said, there is not enough time left to enact a tax cut in 1991.

“Our first choice would be responsible (tax reduction) this year,” he said. “The problem is that the subject of taxes raises some fundamental differences between the Administration and the Democratic-controlled Congress, so it’s extremely unlikely that you would get action even if they stayed (in session) until Christmas.”

Darman said he and Republican congressional leaders have met several times to discuss what kind of tax-cut package might be proposed and how it could be passed with both the Senate and House in the hands of Democrats. “Facing a strong majority, we concluded (that) we wouldn’t get legislation but we would get political conflict that would be an unproductive, class-warfare-type struggle with the Democrats.”

“Or, we’d discuss abandoning the budget agreement, and entering a bidding war, producing nothing,” he added. Either step would rattle the financial markets and make the long-term bond market “nervous,” Darman predicted, adding: “That appears to be an imprudent course.”

The issues of promoting economic growth and tax fairness will still be around in 1992, Darman said, allowing the Administration more time to develop “a package that’s economically and politically sound without adverse effects on financial markets.”

The budget director rejected Democratic criticism that the President is indifferent to domestic distress stemming from the long recession and feeble recovery.

“The President will have all of next year to communicate with the public--his message will get through in the course of next year,” Darman said. “I expect the controversy will be about the difference between his approach and the Democrats’ approach. . . . The election will turn on the state of the economy.”

Darman argued that the President’s efforts to deal with the economy have been frustrated by the Democratic Congress. “The fact that we don’t control either house of Congress makes us less effective in dealing with the economy than we’d like to be,” he said.

The House is now working on a banking reform bill that “threatens to be a step backward by making the banking system less healthy,” he charged.

While the Senate and House have both passed a highway transportation bill that would give some lift to the economy, Darman declared, he has been told that it may take months for a conference committee to resolve differences and get a bill to the President’s desk.

Another proposal to extend tax credits for business research and development expenses is lagging, he added, along with the President’s proposal for a cut in capital gains taxes and changes in Individual Retirement Accounts to allow penalty-free withdrawals for first-time home purchases.

Times staff writer James Risen contributed to this story.