GOP Factions Angle for Influential Budget Post : Legislators: House militants, Senate moderates each want a soul-mate at helm of congressional agency. Fight may set tone of a broader party battle.

A critical internal battle is shaping up between the cadre of militant Republicans who will control the House next year and their more moderate counterparts in the Senate over the appointment of a new director of the Congressional Budget Office.

And the outcome of that struggle, one of the first to emerge since the Republican electoral avalanche on Nov. 8, could set the tone for the broader fight looming within the party for control of the GOP economic agenda in the new Congress.

“This is just a minor example of what we are going to see from now on, which is that there are going to be very serious policy tensions between the Senate and House Republicans,” noted one source close to the selection process for a new chief for the agency.

The selection of a new CBO director to succeed outgoing Director Robert D. Reischauer, whose term expires in January, has become a hot political issue on Capitol Hill this week because House Speaker-to-be Newt Gingrich (R-Ga.) and his allies in the House want to install in the powerful post an ideological Republican who subscribes to Gingrich’s own supply-side philosophy.

Gingrich and probable House Majority Leader Dick Armey (R-Tex.) believe that Reischauer was overly partisan in favor of the Democratic congressional leadership. And they believe that they deserve to have one of their own in the job.

A conservative supply-sider at the helm of the Budget Office could be expected to use the powers of the agency to declare that new tax cuts actually raise federal revenue--and thus would not worsen the deficit.

House Republican leaders also want a CBO director who shares their belief that a capital gains tax cut for corporate America actually would raise tax revenue and thus lower the deficit, because it would give businesses an incentive to invest more in plant and equipment and hire more workers--and so create new economic growth.

Congress previously has given the Budget Office the authority to make official decisions on such budgetary matters for purposes of complying with the budget constraints. So a supply-side ruling from the CBO would enable Republicans to cut taxes without forcing them to make offsetting spending cuts that would keep the budget within existing budget caps.

But the more moderate Senate Republican leadership does not go along with the budgetary math behind the more conservative House Republican economic agenda and is fearful of Gingrich’s efforts to exercise political influence at the Budget Office to achieve his goals.

Senate Majority Leader-to-be Bob Dole (R-Kan.) and incoming Senate Budget Committee Chairman Pete V. Dominici (R-N.M.) apparently are looking for a more traditional CBO director who would be able to reassure the nation’s financial markets that Republicans will not increase the nation’s budget deficit.

So far, Gingrich has approached at least one conservative economist, James C. Miller III, who headed the Office of Management and Budget under former President Ronald Reagan. But sources said that Miller, who ran unsuccessfully against Oliver L. North this year for the Republican senatorial nomination in Virginia, is likely to turn down the job.

But Republican politics in both chambers are already complicating the selection process. Normally, the CBO director is chosen jointly by the two chairmen of the House and Senate Budget committees. But in the House, Rep. John R. Kasich (R-Ohio), the likely Budget chairman, is under fire from conservative Republicans because of his vote earlier this year for President Clinton’s crime bill.

Kasich, who has been the ranking Republican on the budget panel, needs support from conservatives to continue to serve in a leadership position and needs to show his willingness to cooperate with Gingrich and Armey on budget matters. Thus, while he is not a supply-side ideologue, he is expected to allow Gingrich and Armey to determine the selection from the House side.

But Dominici is a traditional Republican who believes that tax cuts need to be offset with spending cuts and he can be expected to fight Gingrich on the issue. He is said to be urging the selection of Bill Hoaglund, his chief budget aide and a moderate on fiscal issues.

But the issue may not be decided quickly, despite Gingrich’s hope to move rapidly on the tax and budget elements of the Republican “contract with America.”

“Gingrich and Armey got their juices up about this but that was before they were aware that there is a normal selection and screening process for choosing a CBO director and that this may take time,” said one source.

But even if Gingrich is successful in his bid to remake the CBO into an outpost for supply-side thinking, Republicans will still confront sharp limits on spending and tax cuts built into current laws.

The budget rules under a 1990 agreement require that if the OMB finds that the spending for a new law exceeds the current budget caps the President must impose a “sequester”--a presidential order that prohibits spending from exceeding the specified level. And the Clinton budget office is certain to declare that a capital gains tax cut reduces federal revenue--and thus expands the deficit.

“The sequester is the real hammer and so the Republicans can do what they want with CBO, because OMB can make it all moot,” said one knowledgeable source.