NEWS ANALYSIS : Economic Fights Likely to Expose Rifts in GOP

Amid the public displays of post-election euphoria and unity, the Republicans who will assume control of Congress in January are quietly positioning themselves for what they expect to be a bitter intraparty battle over tax and budget policy.

The economic policy dispute pits moderate Senate Republicans against more ideologically conservative House GOP leaders and seems certain to reveal deep divisions within the party that had appeared to have been closed by this month’s electoral triumph.

The outcome could determine the success or failure of the Republican campaign to turn Congress into a weapon capable of bludgeoning Washington into accepting radical change.

The new House leaders, led by incoming Speaker Newt Gingrich of Georgia, are interpreting their electoral sweep as a mandate for a reversal of President Clinton’s economic policies and a return to Republican supply-side theory.

The Gingrich camp, energized by its success at gaining control of the House for the first time in 40 years, so far has managed to frame the terms of the economic policy debate with its “contract with America.” The sweeping agenda calls for tax cuts for corporations and individuals, increased outlays for defense, reduced spending on welfare and other domestic programs and a balanced-budget amendment to the Constitution. Incoming House Majority Leader Dick Armey (R-Tex.), who shares Gingrich’s zeal for supply-side theory, says he views the Republican strategy on taxes as an effort to launch a “frontal assault on big government.”

The contract also calls for congressional term limits, tougher federal criminal-sentencing laws and a ban on placing U.S. troops under United Nations command. But at heart, it is a conservative economic manifesto, a loud restatement of Reaganomics.

The volume might turn out to be a little too much for Senate Republicans. Generally far less ideological than their House counterparts, some GOP senators say they find the budgetary and economic arithmetic behind the contract frightful.

Many agree with the Clinton Administration’s assessment that the contract’s mix of tax cuts and new defense spending would cause the federal budget deficit to balloon, largely because many of the offsetting spending cuts laid out in the contract would be nearly impossible to pass through both the House and Senate.

What’s more, the proposal for a balanced budget amendment would force far deeper cuts, putting Republicans into a fiscal straitjacket for the remainder of the century. The conflicting signals on budget and tax policy could prompt the Federal Reserve to again raise interest rates, slowing the economy and widening the deficit even more.

“The big issue that will very quickly confront the House Republicans is that if they want these big tax cuts, they are going to have to pay for them. If this contract is perceived as worsening the deficit, that will drive interest rates up, and that would negate any economic stimulus you might get from cutting taxes,” said Barry Bosworth, an economist and budget analyst at the Brookings Institution think tank in Washington.

Faced with that kind of scenario, Senate moderates are likely to force House Republicans to set priorities. Because they can’t do everything in their contract at once without courting fiscal disaster, the argument goes, they will have to choose which elements they want the most.

Among the critical choices that could confront House Republicans, one is paramount: If push comes to shove, do conservative Republicans want an expensive capital gains tax cut for corporate America more than they want an even more costly tax reduction for millions of middle-class families?

A 50% reduction in the tax on profits from stocks, bonds and other investments, would cost the government an estimated $56 billion over five years. The second, a $500-per-child tax credit for families, carries a whopping $107-billion price tag.

The possibility that the Gingrich camp will be forced to choose one or the other, but not both, could set the stage for a bitter battle between traditional, pro-business Republicans and a new generation of pro-family Republicans over how best to solidify the party’s new political dominance. Some observers are already warning that if the party reverts to classic conservative economic policy favoring wealthy individuals and business interests--without providing significant tax relief to the middle class--its lease on Capitol Hill could be short-lived.

“We think that if it comes down to a choice, Republicans should recognize that they have to go for a pro-family agenda if they want to take advantage of the opportunity they now have to become a majority party with broad-based appeal,” said Bob Morrison, a spokesman for the Family Research Council, a lobbying group promoting Christian family-oriented values.

Yet House Republican leaders are clearly more enthusiastic about a capital gains tax cut than they are about middle-class tax relief. Supply-side conservatives don’t believe middle-class tax cuts produce any lasting economic benefits, while capital gains tax reductions are thought to cause more money to flow into productive investments over the long term.

Rep. Bill Archer (R-Tex.), the likely new chairman of the House Ways and Means Committee, said in an interview that he is committed to pushing a capital gains tax cut through his committee no matter what, but he wants to wait and see whether money is available to finance a middle-class tax cut. The Administration seems to sense that such sentiments could undermine support for the Republicans. Treasury Secretary Lloyd Bentsen sent a strong signal Friday that the White House wants to propose a broad-based middle-class tax cut.

Publicly, members of the incoming House leadership have refused to acknowledge that they could be forced to make such choices. “There is a consensus on fiscal policy in the party. We will pass the contract in the House, and then it will only take about a three-hour conference committee (between House and Senate leaders) to iron out the details,” insisted one GOP House aide.

Such optimism tends to disregard political and economic realities that will soon confront House conservatives. If not handled deftly, they could stall the conservative revolution almost before it can get started. “The House and Senate Republicans are not harmonious on these issues; you can already see the splits coming,” political analyst Kevin Phillips said.

Incoming Senate Majority Leader Bob Dole (R-Kan.) was so leery of the contract and its budgetary impact that he and other leading Senate Republicans refused to endorse it during the fall campaign. Since the election, Dole has signaled that he does not feel committed to accepting the contract as the basis for debate.

Dole is hardly alone. Virtually every key Senate committee dealing with economic policy will be chaired next year by GOP moderates with little apparent interest in an ideological revolution: Bob Packwood of Oregon on the tax-writing Finance Committee, New Mexico’s Pete V. Domenici on the Budget Committee and Mark O. Hatfield of Oregon on the Appropriations Committee. There is not a supply-sider among them.

Packwood, Domenici and Hatfield are likely to oppose efforts by House conservatives to slash welfare and other anti-poverty programs to help finance tax cuts for the rich and the middle class. The House contract calls for saving at least $40 billion over five years through cuts in welfare-related programs.

Even the Senate Agriculture Committee, which will play an important role in 1995 during the five-year reauthorization of the farm bill, will be chaired by a Republican moderate. Sen. Richard G. Lugar (R-Ind.) is considered unlikely to brook House efforts to gut farm programs to pay for a conservative agenda.

Complicating matters further are the personalities and ambitions of the new congressional leaders, a group that includes several rivals for the Republican presidential nomination in 1996. Dole, a likely candidate, could feel compelled to appear more conservative on economic issues to protect himself from attacks from the right by rival presidential aspirant Sen. Phil Gramm of Texas.

On the other hand, Dole and Gingrich have never cared much for each other.

Dole recalled after the election how Gingrich once dismissed him as the “tax collector for the welfare state,” meaning he was so concerned about budget deficits that he would agree to increase taxes to support new Democratic social programs. “Since then, Gingrich has said I’m maturing, so I guess now he thinks I’m a mature tax collector for the welfare state,” Dole quipped.

More fundamentally, Senate Republicans fear that the supply-side theories of the House Republican leadership could blind the conservative wing of the party to the need to deal with the economic problems that have generated so much anger and frustration among voters: stagnating wages and an eroding middle-class way of life. Many believe that the choices the party makes on tax policy in coming weeks could help determine whether it seizes an opportunity to establish itself as the party of the middle class.

“These conservatives are misinterpreting what is wrong with the economy,” one Republican said. “We have an economy where unemployment is low, inflation is low, but people are still angry. And that means something has changed, and we have to come up with new answers, not just return to old issues like a capital gains tax cut.”