Clinton Warns of Diminished Future if Spending Cuts, Taxes Aren't Passed : Economy: The President offers to a joint session of Congress a plan designed to slice $336 billion from the deficit and spend $160 billion on 'investment' programs.

By JACK NELSON and JOHN M. BRODER

Feb. 18, 1993 12 AM PT

TIMES STAFF WRITERS

WASHINGTON —

President Clinton appealed to Congress on Wednesday to enact $496 billion in tax increases and spending cuts in a sweeping four-year program to revive the economy and reduce the deficit, warning that failure to act would be “condemning our children and our children’s children to a lesser life than we enjoyed.”

Clinton, in a nationally televised address to a joint session of Congress, declared that “government spending must be cut and taxes must be raised” to reverse a cycle of rising deficits and declining investment responsible for the nation’s lingering economic malaise.

“Consider the cost of not changing,” he implored. “Unless we have the courage now to start building our future and stop borrowing from it, we’re condemning ourselves to years of stagnation, interrupted by occasional recessions; to slow growth in jobs and no more growth in income; to more debt; to more disappointment.” Clinton offered a plan that would slice the federal deficit by $336 billion over the next four years and spend $160 billion on “investment” programs that he argues will improve the economy over the long run. The plan also contains a $31-billion short-term stimulus package divided roughly equally between new spending designed to create jobs this year and business tax breaks intended to spur hiring in the private sector.

More than half of the long-term deficit reduction would come from new taxes, primarily on families with incomes of more than $100,000 per year. The plan also claims to reduce spending by $222 billion over four years, with $114 billion coming from domestic programs, $76 billion from military spending and the rest from lower interest payments on the national debt.

The tax increases would include a new levy on energy that Administration officials estimate would add about $10 per month to the total energy bill of an average family. Clinton also would increase the percentage of Social Security benefits subject to taxes for retired couples with more than $32,000 in income and individuals with more than $25,000 in income.

Clinton’s 61-minute address represented his blueprint for fulfilling the central campaign pledge that helped him defeat George Bush last year and end 12 years of Republican control of the White House. Clinton promised fundamental change to spur a stagnant economy in the short run and to ensure rising living standards and expanding employment opportunities in the years ahead.

As members of Congress, the Supreme Court, Cabinet members, diplomats and VIP guests filled the floor of the House chamber and its balconies, the President strode to the most exalted stage in American politics like a veteran, not the first-timer that he was. And far from being intimidated by the assemblage and the huge television audience, he seemed to command it, at times expressing a lofty vision of the nation’s future, at times delivering folksy echoes of Ross Perot’s lectures on public responsibility.

Clinton strayed often from his prepared text to add explanatory asides to his intended audience in middle-income America, or, frequently, to offer reassurance to business that he did not intend to strangle the free-enterprise system with higher taxes and more regulations. It was those conciliatory sections of his speech that drew the most enthusiastic applause from both sides of the aisle.

Clinton said the $31-billion stimulus plan he is seeking would create 500,000 new jobs this year, putting people to work rebuilding highways and airports, renovating public housing and bringing new life to rural communities.

“Our immediate priority,” he declared, “must be to create jobs--create jobs now.”

Later this year, Clinton said, he will present to Congress comprehensive programs to overhaul the nation’s health care system and reform welfare programs. Bringing health care costs under control, he said, “would do more for the private sector in this country than any tax cut we could give and any spending program we could promote.”

Most of the new revenue Clinton is seeking would come from raising tax rates on higher-income Americans, a point that he emphasized in his speech. The plan, Clinton said, would increase the income tax rates of only the top 1.2% of all taxpayers. It would boost the top rate paid by couples earning more than about $180,000 a year to 36% from 31%, and would impose a 10% surtax on taxable incomes of more than $250,000.

Clinton emphasized that the provisions of his economic package, taken together, would cost an American family earning $40,000 a year less than $17 a month. Most middle-income Americans would be affected only by the proposed new tax on energy use.

The President said his publicly stated determination to reduce the deficit has contributed to recent declines in long-term interest rates, and he predicted even bigger reductions if his package is enacted. For the middle class, “the increases in energy costs will be more than offset by lower interest costs for mortgages, consumer loans and credit cards,” he said.

But Clinton’s economic proposals, although cheered by most Democrats, have stirred heavy Republican opposition and widespread public skepticism.

Random interviews by reporters with citizens around the country found mixed reactions to the speech, but Clinton could take heart from a snap CNN/USA poll that showed 79% of the respondents generally supporting Clinton’s plan, contrasted with 16% opposing it.

Today, Clinton and his Cabinet members will fan out across the country in a concerted campaign to sell the American people on what he has called a program of “shared sacrifice” needed to prevent economic disaster.

Earlier, he talked by telephone for 15 minutes with independent presidential candidate Ross Perot, seeking the Texas billionaire’s support for the program. And, in an echo of Perot’s own frequent warnings, Clinton told Congress:

“If we do not act now, we will not recognize this country 10 years from now. Ten years from now, the deficit will have grown to $635 billion a year; the national debt will be almost 80% of our gross domestic product. Paying the interest on that debt will be the costliest government program of all and we will continue to be the world’s largest debtor, depending on foreign funds for a large part of our nation’s investments.”

Standing behind the President as he delivered his economic message were House Speaker Thomas S. Foley (D-Wash.) and Vice President Al Gore, in his role as President of the Senate.

Seated next to Hillary Rodham Clinton in the gallery were John Scully, chairman of Apple Computer, and Alan Greenspan, chairman of the Federal Reserve. The symbolism was unmistakable--Scully represents the nation’s cutting-edge computer technology and Greenspan was there as reassurance to the world’s financial markets.

Even before Clinton’s address, Republicans who had been briefed on the plan’s contents blasted it as a tax-and-spend scheme that would create unnecessary government programs and hobble a slowly recovering economy.

Although Democrats generally rallied behind the President, some were concerned about the potential political fallout for those who support the plan. Recent polls indicate that, by a 2-1 margin, Americans believe that Clinton should keep his campaign pledge not to raise taxes on the middle class.

Republicans, who are drafting an alternative program that would focus almost entirely on spending cuts, began girding for a bitter partisan fight.

“There are those who say some taxes are a necessary evil,” House Minority Leader Robert H. Michel (R-Ill.) declared in the GOP’s televised response to the President’s speech. “The difference is that Democrats stress the word necessary and Republicans stress the word evil .”

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), who will play a leading role in steering the package through the House, acknowledged that “nobody likes taxes” and predicted that winning congressional passage would be “a tough row to hoe.”

Clinton recognized that in his speech, declaring: “Nobody likes the tax increases.” But, he said, “let’s just face facts.

“For 20 years, through administrations of both parties, incomes have stalled and debt has exploded and productivity has not grown as it should. We cannot deny the reality of our condition. We have got to play the hand we were dealt and play it as best we can.”

Republicans made clear that they expect Democratic support for the program to be a formidable GOP weapon in next year’s elections.

Here are the major components of the package:

Taxes

Clinton’s program includes $274 billion in new taxes over the next five years, including a $29-billion increase in taxes on Social Security benefits that Administration officials are claiming as a spending cut. In addition, the plan includes at least $11 billion in new fees for government programs. All told, the plan would increase federal revenues by at least $285 billion over five years--the largest such increase in history.

Clinton’s program strikes its biggest tax blow at the wealthiest 1.2% of taxpayers, who would supply $126.3 billion in new revenues for the federal Treasury. He proposed a new tax bracket of 36% that would apply to gross income of more than $140,000 for individuals and $180,000 for couples.

The Medicare payroll tax--1.45% paid both by workers and employers--now charged on the first $135,000 of wages would be charged on all salary income.

Families and individuals earning $30,000 a year or less would be insulated from the new taxes through an expanded federal earned-income tax credit.

Medium and large businesses would pay more taxes, with the corporate rate of 34% climbing to 36% for taxable income of more than $10 million.

A broad-based energy tax, based on the heat content of fuels, would raise $71.4 billion, with energy producers expected to pass the cost through to consumers, adding about $118 a year to the expenses of a family of four making $40,000 a year.

Spending Cuts

On the spending side, the plan claims reductions of $222 billion over the next four years, with larger cuts in the future. That figure does not include the Social Security tax change as a cut. The four-year reduction includes cuts in domestic spending programs by $114 billion over four years, including $76 billion in cuts in so-called entitlement programs, the largest being a set of $38 billion in cuts in Medicare and Medicaid spending.

The plan would cut defense spending by $76 billion over four years, compared to the amount the George Bush Administration had planned to spend. In addition, Clinton’s budget experts have assumed that their plan will lower interest rates, leading to a $32-billion reduction in the amount of interest the government will have to spend to service the national debt over the next four years.

The major savings in Medicare would result from reduced payments to doctors, hospitals and other health care providers.

The Clinton budget would save more than $5 billion in hospital reimbursements over a five-year period by paying hospitals at 1% less than the rate of medical inflation. Similarly, reduced payments to physicians would save $2 billion, Clinton’s budget document says.

In Medicaid, proposed changes would save $225 million in fiscal year 1994, $2.1 billion in 1997 and $8.7 billion over five years.

The overall budget package includes cuts in more than 100 federal programs, from overseas broadcasting to subsidies for wealthy farmers to student aid.

The plan envisions cutting $8 billion from the federal budget by wringing waste out of government agencies and saving $11.5 billion by refinancing the federal debt with shorter-term notes.

In addition, there will be no raises for federal employees next year, and pay increases for 1995 to 1997 will be pegged to inflation minus 1%, saving an estimated $8.3 billion.

Short-term Stimulus

Clinton proposes $31 billion in immediate spending, and business tax breaks, to give the economy a “booster shot” to ensure that the recovery continues and to create 500,000 new jobs.

The new jobs will come through a summer youth employment program, highway construction projects, conservation programs and government building upgrades.

The stimulus plan also includes $15 billion in tax breaks for companies that invest in new plants and equipment, thus, it is hoped, creating jobs. The stimulus plan has been attacked on two fronts: Some say it is too small to have any appreciable effect on a $6-trillion economy and others contend that the economy is growing nicely and needs no short-term boost.

Investment

The Clinton package includes $160 billion in new spending, or “investment” as the President prefers to call it. The spending package includes new funds for public works improvements, urban development, health care, worker training and education. It is designed to create jobs and increase American competitiveness, aides said.

Laura D’Andrea Tyson, head of the Council of Economic Advisers, said the Administration “conservatively” estimates that the investment package will create 8 million to 9 million new jobs over the next four years.

Among the largest components of the program is $48 billion for a series of measures known as “Rebuild America.” In this part of the plan are more money for highways, mass transit and airport expansion; grants for technology development; spending on environmental research and energy conservation; targeted funds for ailing cities, and money for waste-water treatment and rural development.

About $38 billion is earmarked for education and welfare programs for women, children, youth and displaced workers.

The plan sets aside $25 billion for tax breaks for poor working families, extension of unemployment benefits and an anti-crime package.

In addition, Clinton wants $26 billion in new health care spending for AIDS research and treatment, drug abuse programs, nutrition assistance and veterans’ medical care.

Lastly, the long-term investment package asks $24 billion in incentives for business to invest in new equipment and in tax breaks for struggling corporations.

Contributing to this story were Times staff writers Rudy Abramson, Edwin Chen, Marlene Cimons, William J. Eaton, James Gerstenzang, David Lauter, Gebe Martinez, Ronald J. Ostrow, Robert Rosenblatt, Elizabeth Shogren, Constance Sommer and Robert W. Stewart.

TEXT OF CLINTON SPEECH: A20-A21