Bush Plan Said to Seek Tax-Exemption Boost : Economy: A hike of $500 to $1,000 for dependents is likely. The affluent would help to finance package.

President Bush’s economic growth package is likely to seek a $500 to $1,000 boost in the income tax exemption for dependents and to finance the tax break, in part, by cutting Medicare and other entitlement benefits for affluent Americans, Administration sources said Thursday.

The proposed expansion of the personal exemption--aimed at helping the financially strapped middle class--would be the centerpiece of an economic stimulus plan that could cut taxes by more than $50 billion over five years, Administration sources said.

However, Bush has not yet decided on the details of his plan, which will be unveiled in his Jan. 28 State of the Union address, Administration officials cautioned.

They noted, for instance, that Bush has not determined exactly how much the personal exemption should be increased. He also has not determined whether to limit the proposed expansion only to children, or to make a smaller increase in the exemption applicable to all taxpayers.

Under current law, taxpayers claim one $2,300 exemption for every dependent. Increasing the exemption by $500 would lower the annual tax bill of a single filer in the 28% tax bracket by $140. The benefit would increase for taxpayers with more dependents or those in a higher tax bracket.

The package is designed to shore up his standing among middle-class voters, who are increasingly distressed about an economy that the President, talking to voters in New Hampshire this week, agreed is now in a “free fall.”

As Bush’s popularity in the polls has plunged because of the recession, the White House economic plan has become increasingly important to the President’s reelection hopes. In fact, the Administration views the economic package as the central economic manifesto for the Bush campaign, one that will allow Bush to reach out to the middle class while still providing benefits for his natural supporters among the affluent.

Yet as details of Bush’s economic package began to emerge in Washington, Democrats in Congress offered their own budget proposals that go much further than those likely to be offered by Bush.

Senate Majority Leader George J. Mitchell (D-Me.) called Thursday for cutting $100 billion from the Pentagon budget over five years and putting aside deficit constraints to heal the ailing economy. Mitchell also repeated the Democratic call for a cut in taxes for the middle class and for tax breaks for business investment and for home ownership.

Other Democrats in Congress charged Thursday that Bush still does not have a credible plan to pay for his tax cuts. Key congressional staff members said that reductions in Medicare benefits for the affluent are almost certain to be widely rejected by both Democrats and Republicans in Congress, leaving many of Bush’s anti-recessionary measures unfunded.

Other congressional sources said that they were stunned that Bush would propose politically unpalatable cuts in Medicare in an election year. “If this is the Bush plan, it’s not going anywhere,” said one senior Democratic Senate staff member.

In fact, in his address, Bush seems likely to play down the big defense spending cuts that both Democrats and Republicans believe he will eventually need to help pay for his anti-recessionary plan.

Although Bush is expected to propose additional defense spending cuts of between 4% and 5% over the next five years, he may not link his Pentagon spending cuts directly to his tax proposals in his State of the Union address.

In fact, the proposed White House budget for next year, which will be released the day after the State of the Union address, also may not reflect the defense cuts now under consideration at the White House. That could be at least partly because the final decisions on Pentagon spending will not be made in time for the budget’s printing schedule.

With the status of the defense budget still uncertain, sources said that Bush is apparently considering using his speech to broadly ask Congress to work together on cutting defense spending, without offering specifics.

Instead, he now seems willing to push for a tax cut plan first, before working out an agreement with Congress on offsetting defense spending cuts.

Bush will argue, however, that his package can be at least partly financed through controversial cuts in entitlement benefits for affluent Americans. For instance, the Administration seems determined to push for new taxes on Medicare benefits for the wealthy and to reduce crop subsidies for rich farmers. Bush failed to win similar cuts in last year’s budget, when he said reductions in entitlements for the affluent would have saved $47 billion over five years.

Although the final decisions on the package will be made by Bush either today or over the weekend, the plan will include a tax credit for first-time home buyers that would provide a $2,000 temporary credit this year or a larger credit spread over two years.

Bush also would revive an earlier proposal to allow individuals to transform their individual retirement accounts into so-called Family Savings Funds, which would give the government new tax revenues in the short run, but provide savings later for taxpayers. The family funds would be similar to IRAs, except that the money could be withdrawn without being taxed if used for specified purposes, such as tuition payments.

Bush would also include a $3,000 tax credit for uninsured poor Americans to pay for health insurance, as well as a $3,000 deduction for middle-income Americans who have to pay for health insurance. The health care tax provisions are designed to address the growing public concerns over the soaring medical costs that are squeezing both the poor and the middle class. For the business community and the affluent, the plan is likely to offer a capital gains tax cut, an expansion of the depreciation allowances that industries can take for investments in new equipment and new tax benefits for the moribund real estate industry.

Bush plans to argue that his capital gains tax cut actually would raise federal revenues, and thus would help to pay for other aspects of his growth package. But Democrats, who largely oppose a capital gains reduction, argue instead that capital gains is a money loser for the federal government. They are likely to chide Bush for attempting to help pay for his package with a tax cut.

Many Democrats warn that the only way the White House will be able to win a capital gains tax cut will be to agree to pay for it with a new, higher income tax bracket for the affluent, a trade-off that Bush has opposed. But Democrats note that it will be more difficult for Bush to oppose higher taxes on the rich in an election year, when he must also appeal to working Americans.

But the other aspects of Bush’s business tax proposals are likely to be met with a more favorable reception in Congress. There is broad agreement among Democrats, for example, on the need for an investment tax credit or accelerated depreciation, and heavy lobbying from hard-hit real estate developers has made it increasingly likely that some kind of tax break for the housing industry will be approved by Congress.

Mitchell’s plan for deep cuts in the military budget would pay for an immediate middle-income tax cut and tens of billions in anti-recession grants to states and cities.

The size of the “peace dividend” proposed by Mitchell far exceeds anything being considered by the Bush Administration. The Mitchell plan also provides for the kind of aid to the nation’s cities that Bush has not supported.

Mitchell said that the 1990 budget agreement should be revised to permit a broad shift in funds from the military budget to domestic programs. He said that it would be a “prudent cut, reflecting a changed world,” in the wake of the collapse of the Soviet Union.