Bush Vows Fight on Hard Times : He Calls for Tax Changes to Spur the Economy : State of Union: The President proposes adjusting withholding tables to give wage earners more money. He demands congressional action by March 20 on his plan.

President Bush, trying to rally a fearful and recession-weary nation, declared in his State of the Union address Tuesday night that hard times “will not stand” and offered economic proposals intended to put more money in the hands of American taxpayers.

The most immediate elements of Bush’s plan could be felt within days: He ordered Treasury Secretary Nicholas F. Brady to adjust federal tax withholding tables that would allow wage earners to reduce the amount of money withheld from their paychecks, in return for smaller refunds each year.

The proposal was one in a long list of election year tax changes--including cuts in capital gains taxes and increases in various exemptions--that will be the subject of congressional debate for weeks and even months to come.

Seeking to regain the unanimity of spirit that blossomed during the Persian Gulf War a year ago--and echoing the defiant words with which he responded to that crisis--Bush said in his speech before a joint session of Congress and a nationwide television and radio audience:

“We are going to lift this nation out of hard times inch by inch and day by day, and those who would stop us had better step aside. Because I look at hard times and I make this vow: This will not stand.”

In an address marked by an urgent but conciliatory tone--and interrupted by cheers and prolonged applause nearly 70 times during the 54-minute delivery--he urged Congress to put aside partisan considerations at the start of an already volatile election year and demanded action by March 20 on the heart of his economic program.

“My friends, the people cannot wait. They need help now,” Bush said.

In the Democrats’ response broadcast immediately after Bush spoke, House Speaker Thomas S. Foley of Washington said: “We seek a fundamental change from the unsuccessful economic policies of the past 12 years.”

In a new round of tax cuts, he said: “We will insist that this time, the benefits must go to working families, not to the privileged. . . . We will insist that a middle-class tax cut be paid for not by taking money that should go to schools and health care, but by calling on the richest of our citizens, at long last, to pay their fair share.”

Despite recent strains between Bush and the Republican right wing, a cross section of congressional conservatives said that they were pleased with the President’s performance. “This will be looked back on as a turning point,” said Rep. Dana Rohrabacher (R-Long Beach). “I think he’s bottomed out and I think you’re going to see him going up in the polls now.”

The challenge for the President was to lay out an economic and social program that would not only lift the spirit of a nation but give life to his campaign theme--the blunt message: “I care.”

Nine and a half months before the election, the country’s economic troubles--marked by unemployment hovering at 7%, rising bankruptcies and falling real estate values--have created an unease among the electorate and a sense of struggle in the President’s camp, where only a year ago the 1992 political campaign appeared to offer little challenge.

Thus, the President’s speech, while calling for a nonpartisan attack on the problems of the moment, was delivered in one of the most partisan of times.

That is one reason he focused such attention on the change in income tax withholding tables. That step requires no congressional action.

Although it will have no impact on the total amount of an individual’s annual tax payment, Administration officials said that it would allow each taxpayer, on average, to reduce annual tax withholding by $350 a year--or $7 a week.

The cost to the government, they said, would be a $25-billion increase in the annual federal budget deficit.

The President also:

--Proposed allowing parents to claim an additional $500 personal exemption for each child, beyond the $2,300 personal exemption that taxpayers are expected to be able to claim this year for each dependent.

--Asked Cabinet-level departments and government agencies to delay for 90 days enacting federal regulations that could limit economic growth and encouraged bank regulators, cracking down in the wake of the savings and loan scandals, to halt “regulatory overkill” that he said has limited growth-producing bank loans.

--Proposed a 15% investment tax allowance, that would provide faster depreciation write-offs for companies that spend money on new plants or equipment.

--Sought to boost the real estate industry, among those hardest hit by the recession, by allowing first-time home buyers to use individual retirement account savings, without penalty, for their purchases and giving them a $5,000 tax credit for those purchases.

--Renewed his call for a cut in the capital gains tax, which Congress has blocked. “This time, at this hour, I cannot take ‘no’ for an answer,” Bush said, drawing a 30-second standing ovation led by Republicans. He would trim the tax from 28% to 15.4% on profits made on such investments as stocks, bonds and real estate and argued that such a cut “increases jobs and helps just about everyone in our country.”

Bush offered few details of his proposals to make health care available to the 35 million Americans who have no health insurance coverage--an issue prominent in the election campaign.

He rejected an approach, favored by many congressional Democrats, that would require businesses to offer employees health insurance or pay a special tax that the federal government would use to buy insurance for the uninsured.

He said that his plan, over which some of his closest aides are still arguing, would provide a health insurance tax credit of as much as $3,750 for each low-income family. It also would provide access to basic health insurance for Americans “even if they change jobs or develop serious health problems.”

For weeks the President’s address has riveted the attention and energy of the White House as Bush has fended off questions about his plans to promote economic recovery by telling questioners to “stay tuned” until Tuesday night’s speech.

The political sensitivity of the address was reflected in the decision to seek assistance in its writing from Peggy Noonan, one of former President Ronald Reagan’s speech writers who also drafted Bush’s speech to the 1988 Republican National Convention, and from Roger Ailes, his media adviser in the 1988 presidential campaign.

Bush framed the speech, which his aides said could be the most important of his term, in the context of the “changes of almost biblical proportions” that rocked the world in the past year, prompting an outburst of applause when he said: “Communism died this year.”

“The biggest thing that has happened in the world in my life--in our lives--is this: By the grace of God, America won the Cold War,” said Bush, who flew a torpedo bomber over the South Pacific in World War II.

Saluting “the American taxpayer” for bearing the burden of the financial cost of the Cold War against the now-collapsed Soviet Union, the President said:

“Tomorrow, our children will go to school and study history and how plants grow. And they won’t have, as my children did, air raid drills in which they crawl under their desks and cover their heads in case of nuclear war.”

As anticipated, Bush offered to cut in half the nation’s arsenal of nuclear warheads if Russia and the other onetime Soviet republics do, too.

Bush said that he would shut down production of the B-2 Stealth bomber at 20 planes, rather than the 132 originally planned.

He said that he would cut $50 billion from the planned defense budget over the next five years, producing a 30% cut in defense spending by 1997. But at that he drew the line.

“This is a fact,” he said. “Strength in the pursuit of peace is no vice; isolationism in the pursuit of security is no virtue.”

Even in the seriousness of the moment, Bush sought to poke fun at himself, recalling the incident in Tokyo, when--suffering from stomach flu--he vomited at a dinner onto the lap of Japanese Prime Minister Kiichi Miyazawa.

Referring to Speaker Foley and Vice President Dan Quayle, looking down on the well of the House of Representatives from which he spoke, Bush said: “I see the Speaker and the vice president are laughing. They saw what I did in Japan. They’re just thankful they’re behind me.”

Although Bush cast the speech in bipartisan tones, he said that if there is no action on his economic proposals by the mid-March deadline he sought, the gloves would come off.

“From the day after that, if it must be: The battle is joined. And you know, when principle is at stake, I relish a good fair fight,” he said.

In other efforts to help invigorate the stalled economy, the President called for allowing taxpayers to deduct the interest costs on student loans from the amount of their income that is subject to taxation. And he proposed expanding the rules governing individual retirement accounts to enable savers to withdraw their money for education and medical expenses without having to pay the 10% early withdrawal penalty.

To spur more investment, he also sought to enable home sellers to deduct any losses they may incur on the sale of their homes. And he proposed changes in tax laws affecting real estate to enable developers to use rental losses from properties that they have developed to help offset income from other parts of their businesses.

He said, further, that he will seek to ease current rules that discourage pension funds from investing in real estate. The 10% tax credit would be available to any taxpayer who purchased a home between Feb. 1 and Dec. 31 of this year and had not owned one during the three previous years.

To benefit business, he called on Congress to provide for faster depreciation for business spending on new plant and equipment by allowing firms to write off an extra 15% of the cost during the first year--a move designed to spur more capital investment.

He also proposed repealing the luxury tax that lawmakers imposed last year on the sale of private airplanes and yachts--a move that all sides now agree has hurt the aircraft and boating industries.

Even among key House Republicans, the Bush proposals--particularly in the health care arena--are controversial enough so that many of their details had to be deleted from the fiscal 1993 budget message at the eleventh hour.

The President made only passing reference to trade, education, crime and housing, urging support for already unveiled programs, some of which have been stalled in Congress.

Times staff writers Edwin Chen, Douglas Jehl, Art Pine and Robert Stewart contributed to this story.

PREVIEWING THE BUDGET: The real estate industry stands to win big from the President’s proposed plan. D1