Senate Democrats OK Compromise on Economic Plan : Deficit: Package hammered out by key lawmakers replaces Clinton’s energy tax with 4.3-cent-a-gallon hike in gas levy. It also makes additional cuts in Medicare.

Key Senate Democrats resolved their deep differences over President Clinton’s economic plan Wednesday, agreeing on a compromise that replaces his energy tax with a 4.3-cent hike in the gasoline tax, deeper cuts in Medicare and a smaller tax break for the working poor.

The package, backed by all 11 Democrats on the pivotal Senate Finance Committee, projects deficit reduction of $508 billion over the next five years, with spending cuts slightly exceeding tax increases, said Senate Majority Leader George J. Mitchell (D-Me.).

“It is tough, fair, balanced and will reduce the deficit,” Mitchell said. “It is not a budget of smoke and mirrors.”

The compromise removes a major obstacle to Senate passage of the President’s economic agenda: the opposition of oil state lawmakers to a proposed “BTU tax” on most forms of energy. But it could set the stage for more problems down the road if House members object to the additional cuts in Medicare and other changes made in the Senate.

The substitute retains Clinton’s proposals to raise individual and corporate income tax rates and reduce spending on many programs in an effort to bring down the burgeoning federal deficit. But it rejects Clinton’s call for a broad-based energy tax, delays the income tax increases, softens a tax hike on Social Security recipients, imposes an unexpected surcharge on capital gains and extracts bigger cuts from some key programs than Clinton had contemplated.

Treasury Secretary Lloyd Bentsen praised the agreement, calling it “an important step along the path to enactment” of Clinton’s economic plan. He stopped short of endorsing the contents of the plan, however, and the White House suggested that some of the President’s provisions that were abandoned could be restored after the bill leaves the Senate.

Mitchell said the compromise carries out Clinton’s pledge to make the affluent bear the biggest share of higher taxes. Roughly 80% of the tax increases contained in the compromise would affect taxpayers who earn more than $100,000 a year, he said, while middle-income wage-earners would pay only a “few more dollars a month” in higher taxes.

The proposal, adopted after two days of hard bargaining behind closed doors, was previewed for all 56 Senate Democrats during a private caucus Wednesday evening in hopes of assuring its passage by the full Senate next week.

It is expected to clear the 20-member Finance Committee today with the support of all 11 Democrats and the unanimous opposition of all nine Republicans on the panel.

GOP lawmakers are opposed to Clinton’s original package, a version of the measure previously approved by the House and the Senate compromise on grounds that in each case, the legislation would impose one of the largest tax hikes in history.

“I think it’s a good balance,” said Sen. John B. Breaux (D-La.), one of the leading critics of Clinton’s original energy tax, referring to the smaller gasoline tax increase that he and other Democrats devised.

The new levy would increase the price of gasoline and diesel fuel by 4.3 cents a gallon but would not apply to natural gas, coal or other forms of energy.

The outcome reflects a prolonged tug-of-war between competing forces in Congress, particularly rural and urban lawmakers.

Under the rules governing the federal budget process, changes that lower taxes in one part of the massive budget bill must be offset by raising revenues or reducing spending elsewhere.

Sen. Max Baucus (D-Mont.) told reporters that the President had placed telephone calls to members of the Finance Committee Wednesday, telling them to “get it done today,” without specifying what kind of changes to make.

Assuming that the legislation clears the full Senate, it faces the prospect of additional revisions in a Senate-House conference committee before a final version is produced for ratification by both chambers and signed by the President.

The White House said it hopes the conference committee will develop a bill more in line with the President’s original recommendations, including some form of broad-based energy tax.

“As long as the process moves forward and maintains $500 billion in deficit reduction, . . . it’s fair (and) there is a broad-based energy tax in there,” the President will be pleased, said White House Press Secretary Dee Dee Myers.

The compromise retains the bulk of Clinton’s original proposals, but the Finance Committee Democrats rewrote major parts of the White House plan. Here are highlights of the changes:

* Medicare: On top of $49 billion in Medicare cuts approved by the House with Clinton’s support, the Senate substitute would impose additional cuts of $19 billion over five years, aimed primarily at hospitals, doctors and other medical providers rather than elderly patients.

* Income tax rates: The compromise would postpone until July 1 higher taxes on upper-income individuals and large corporations that Clinton wanted to take effect last Jan. 1. Even so, the new version would raise $107 billion over the next five years, just $8 billion less than the House bill that incorporated the President’s timetable.

* Working poor: The House-approved plan to expand the earned income tax credit for families of low-income workers was pared back from $29.3 billion over five years to about $20 billion in the Senate package. Clinton asked for the provision to offset some of the impact of his proposed energy tax.

* Capital gains: While the President did not suggest it, the committee Democrats surprisingly decided to apply a 10% surtax on capital gains realized by Americans with taxable incomes over $250,000. In another unexpected change, the compromise drops a provision to provide selected cuts in capital gains taxes on long-term investments in small business, a proposal sponsored by Rep. Robert T. Matsui (D-Sacramento) to aid smaller high-tech firms.

* Social Security: The President’s plan to raise taxes on better-off recipients of Social Security benefits was modified in the Senate plan so that higher levies would be imposed only on individuals with incomes above $32,000 a year and couples earning more than $40,000 a year. The original proposal would have affected individuals earning more than $25,000 a year and couples earning more than $32,000 annually.

* Inner-city areas: The Senate bill does not contain any of the tax breaks for business investment in distressed urban areas now included in the House bill, but Senate leaders said they would be in the final version of the bill that comes out of a conference committee.

The Senate Democrats’ alternative also drops a House provision to raise taxes on barge fuel and lowers the tax on alcohol fuels produced from grain and wood. Clinton’s proposal to cut back sharply on tax breaks for U.S. firms with plants in Puerto Rico also was modified.

Like the House bill, the Finance Committee plan would repeal the luxury tax on boats, aircraft, jewelry and furs, retroactive to Jan. 1, and modify the tax on high-priced cars by indexing it for inflation.

In a change affecting small business, the Senate Democrats decided to raise the amount of fast write-offs for equipment purchases from the present $10,000 a year to $15,000, rather than endorsing the more generous $25,000 allowance in the House bill.

They also limited the duration of some special tax breaks for business in an effort to reduce the amount of tax increases necessary to achieve the deficit-cutting target. For example, a tax credit for research was extended for one year in the Senate alternative, instead of the five-year extension in the House bill.

Tax credits for job creation, mortgage revenue bonds, employer-provided educational assistance and small-issue manufacturing or agricultural bonds would be extended for two years in the Senate version, rather than five years as provided in the House bill.

The corporate income tax rate, which Clinton originally proposed to raise to 36% from the current 34%--was fixed at 35% in both the House version and the Senate Finance Committee plan.

Democratic congressional leaders said they hoped to put the massive budget reconciliation bill on a fast track that would lead to its final approval before the House and Senate depart July 1 for a Fourth of July recess.

If the Senate approves the bill next week, a quick-acting Senate-House conference committee will attempt to produce a final version more acceptable to Clinton and send it back to the Senate and House for consideration by the end of next week.

That could send the bill to Clinton for his signature within the next 10 days.

Despite the relatively swift accord reached by the Finance Committee’s sometimes fractious Democrats, Mitchell said there is “a difficult and daunting path ahead” when the measure comes to the Senate floor.