Democrats Block Vote on Bush Tax Bill : Legislation: The Senate action sets the stage for the passage of an alternative measure that would raise levies on the wealthy. It faces a certain veto.

Senate Democrats blocked a vote Wednesday on President Bush’s stripped-down emergency tax-reduction plan, paving the way for passage today of a Democratic alternative that would cut taxes for middle-income Americans while raising them for the rich.

Bush has promised to veto the Democratic legislation.

The action came on a party-line vote of 60 to 37 in which the Senate’s Democratic majority sustained a point of order raised by Sen. Jim Sasser (D-Tenn.), chairman of the Senate Budget Committee, complaining that Bush’s plan violated the 1990 budget agreement. That agreement prohibits spending that would raise the budget deficit.

The outcome enraged Senate Republicans, who had argued that, having been pressured initially by Democrats to propose a tax-cut plan in the first place, Bush deserved the chance to have the Senate vote on his own tax-reduction package.

The Democrats’ refusal to permit that vote was almost certain to inflame partisan tensions over the tax-cut issue, which already has become a political football both in the presidential campaign and in congressional races.

Ironically, Sasser raised his point of order only after Republicans threatened to take similar steps to try to block the Democratic bill. Depending on how their cost is calculated, both measures could have been judged to breach congressional limits on the budget deficit.

As soon as the Republicans hinted at their strategy, however, Senate Majority Leader George J. Mitchell (D-Me.) ordered technical changes that placed the Democratic bill within the budget limits once again. Under Senate rules, sponsors of any measure may alter it at will.

It was then that Sasser made his move. The Senate defeated a hastily mounted Republican effort to waive the budget regulations, and the entire Bush package was ruled out of order.

But the changes Mitchell pushed through turned out to be more significant than Democrats initially let on, narrowing the scope of a $300-a-child tax credit for middle-income Americans that has been billed as the centerpiece of the Democratic legislation.

Under the original version of the Democratic bill, the credit would have been available in full to families with incomes of $50,000 or less, and would decline gradually for those earning between $50,000 and $70,000 a year. Those earning over $70,000 would be ineligible.

But the changes that Mitchell made on Wednesday lowered those limits so that the credit declines more rapidly, between $40,000 and $50,000. That reduced the cost of the tax credit to about $28 billion, down from $31.5 billion, leaving the bill within the budget limits.

They also stretched over two years a provision in the bill allowing businesses to take an extra 15% tax write-off for purchases of new plant and equipment. Under the new version, companies would be able to claim half the credit this year and the rest in 1993.

The Senate now is scheduled to take up the Democratic bill, with plans to finish it later this week--in time to send it to Bush’s desk by the March 20 deadline that the President set in his State of the Union address.

Assuming that the Democratic measure passes, it then will have to be reconciled with a House-approved version that contains a slightly different tax cut for the middle class. Most of the provisions in the two bills are essentially the same.

Earlier, Senate Republicans had planned to allow the Democrats to push the tax-cut measure through as quickly as possible so that Bush can carry out his pledge to veto it. Bush’s main objection is that the bill would raise taxes for some groups.

Both sides are convinced that they can capitalize politically on the impasse over the tax-cut issue. Democrats hope to blame Bush for vetoing the tax-reduction bill, while the White House believes it can score points by attacking the Democrats for raising taxes.

As he has almost every day for weeks, Bush reiterated his veto threat on Wednesday, contending that the Democratic measure would only cost the economy jobs. He vowed that, if the lawmakers send him the Democratic bill, he will “take this case to the American people.”

Senior Bush campaign strategists have indicated that if the Democratic measure ultimately goes through, Bush will consider going on nationwide television to lambaste the lawmakers publicly.

But Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, asserted that the Democratic bill would heighten the “fairness” in the tax system, and said that Democrats would not abandon the measure just because Bush has threatened to veto it.

The “emergency” Bush package that the Senate rejected Wednesday contained these major elements:

--Cut the effective tax rate on capital gains--profits from the sale of stocks or other assets, to 15.4%, down from the 28% now, for assets that the investor has held three years or more.

--Provide a new 15% investment tax allowance, designed to speed depreciation for business spending on new plant and equipment by allowing companies to take an additional 15% in write-offs during the first year after a purchase is made.

--Provide a tax credit of up to $5,000 to help first-time home buyers finance their new purchases. The credit would apply to anyone who has not owned a home during the last three years.

--Allow those who have individual retirement accounts to use up to $5,000 of those savings without incurring a 10% early withdrawal penalty if they use it to finance first-time home purchases.

--Restore pre-1986 rules that allow construction and real estate firms to use up to 80% of their losses from so-called “passive” investments to offset other income. The tax break would be limited to property that already is in service.

--Reduce the tax burden for those required to pay the alternative minimum tax--designed to ensure that wealthy taxpayers who can claim substantial reductions cannot use them to eliminate all tax liability--by simplifying the way the tax is calculated.

--Provide new tax incentives for encouraging pension plans to invest in real estate by modifying existing tax rules that discourage such investments.

--Repeal the 10% excise tax on luxury boats, private airplanes, jewelry and furs enacted as a soak-the-rich measure in the 1990 budget accord but later found to have hurt boat manufacturers and other industries.

In offering the President’s proposals on Wednesday, Sen. Bob Packwood (R-Ore.) argued that approving it would serve as “an olive branch” to the President. “The time is right, and the iron is hot,” he urged the Senate. But the majority refused to go along.

The Democratic tax bill contains versions of each of the President’s proposals, but many of them have been diluted or significantly altered. Some Democrats have said they do not favor enacting any tax cut this year, for fear that it would exacerbate the federal budget deficit.