Bush Ready to Give Up Capital Gains Tax Cut

The Bush Administration, faced with a faltering recovery in the midst of a tough reelection campaign, is prepared to abandon its long-sought capital gains tax cut to win approval of other stalled economic growth proposals, Administration officials said Tuesday.

With the Senate about to consider what may be the last major tax bill of the year, the Administration is preparing to make a final push for passage of the economic growth package proposed by President Bush in January but defeated by Congress in the spring.

White House officials stressed that in their negotiations with lawmakers, they will continue to lobby for the President’s entire package, including the proposed capital gains tax cut sought by Bush but opposed by many congressional Democrats.

But senior Administration officials, after intense internal debate, have decided that they ultimately will accept a streamlined package containing no capital gains tax cut if necessary to win congressional passage of some kind of economic growth legislation this year.

The capital gains proposal would reduce taxes paid on profits from investments in stocks, bonds and other assets. It is a central element of Bush’s growth package, which also proposes a $5,000 tax credit for first-time home buyers, penalty-free withdrawals from individual retirement accounts for college tuition and home down payments, an investment tax allowance for businesses and other targeted tax breaks designed to stimulate the economy.

One senior White House official who requested anonymity said the Administration had decided to “get what we can get” from Congress, even if it means abandoning the capital gains measure.

“The President wants to have an economic package,” another senior official said. “We will accept a package without capital gains,” he said, as long as the Democrats do not impose measures that the White House finds troublesome.

Proponents of a capital gains tax cut contend that it would be one of the most effective ways to encourage productive new investments that would generate jobs and expand the economy. Opponents, however, say that most of the benefits would flow to the wealthy.

The Administration’s decision reflects a recognition that, if it insists on retaining a capital gains tax cut, Democrats will either demand higher taxes on the wealthy or kill other tax provisions that the Administration wants enacted.

Many of the tax provisions contained in the President’s growth plan have broad support in Congress and might secure passage if the White House and the Democratic leadership in Congress can avoid a partisan fight over capital gains and higher taxes on the wealthy.

The White House decision to compromise with Congress represents a victory for Administration moderates who believe it is politically more advantageous for Bush to win passage of a modest growth package than to make a firm ideological stand on capital gains. Holding out for a capital gains tax cut, they think, would leave the President vulnerable to criticism that he has failed to take action to turn the economy around.

“We are going for a legislative solution,” rather than a political fight that does not lead to a deal on taxes, one Administration source said.

Some conservative Bush aides--most notably Jack Kemp, secretary of Housing and Urban Development and a leading conservative voice in the Administration--had urged a more confrontational stance with Congress during the presidential campaign’s stretch drive.

But the White House and the Bush campaign concluded that it would be politically unwise for the President once again to go head to head with Congress if it meant that he would emerge with nothing to show voters.

Political pressure is building largely because the economic news is turning worse just as the election season is heating up. On Tuesday, the Conference Board, a private business group, reported that consumer confidence fell sharply in July. And on Thursday, the government is expected to report that the economy’s rate of growth slowed in the second quarter. Economists forecast that the report will show that the growth in the gross domestic product, the nation’s output of goods and services, fell to a tepid pace of about 1.5%, down from the first quarter’s rate of 2.7%.

The Bush Administration hopes to push its growth package as early as this week, while the Senate is considering legislation that includes provisions for urban enterprise zones and other tax measures. The Administration may push its growth agenda in the Senate Finance Committee, which handles tax matters, or when the tax legislation reaches the Senate floor.

Although 36 states and the District of Columbia now permit urban enterprise zones, the committee chairman, Sen. Lloyd Bentsen (D-Tex.), will be pushing legislation that would provide federal tax benefits for enterprise zones for the first time. Such enterprise zones, strongly supported by the Bush Administration, are supposed to give businesses special breaks on taxes and regulations when they open plants and create jobs in designated areas.

Administration officials made it clear that they hope to attach as much of their growth plan to that legislation as possible, but that they may accept a tax bill that has only a few of its provisions.

Paradoxically, the White House decision to seek a legislative compromise on taxes comes just as Administration officials are intensifying their rhetorical attacks on the Democrats over economic matters. On Tuesday, for instance, White House Budget Director Richard G. Darman engaged in a bitter partisan debate with congressional Democrats in testimony in the House and Senate, repeatedly arguing that the economy and the federal deficit are much worse than they would be if Congress had passed the President’s entire growth agenda.

The Bush Administration may still fall back on a more confrontational strategy if it is unable to make headway on a tax bill. Darman told reporters Tuesday that the White House is considering a series of politically charged vetoes of a series of appropriations bills--a strategy that would highlight Bush’s differences with the Democrats on spending. Although no decision has been made on that plan, Darman indicated that the White House might seek to apply extraordinarily stringent standards on the appropriations bills as a way of sparking a political battle.

Times staff writer Douglas Jehl also contributed to this story.