GOP Links Tax Cuts, Deficit End : Finance: Agreement by House Republicans eliminates major barrier to bill. Proposal requires approval of a spending plan that promises a balanced budget by 2002.

House Republicans, sweeping aside a major barrier to the tax bill that is scheduled for a vote this week, agreed Monday to link their tax cuts to the goal of eliminating the federal deficit.

Under the agreement, an array of proposed tax cuts aimed at businesses and families with children would not take effect unless Congress approves a spending plan this year that promises a balanced budget by the year 2002.

“This will hold Congress’ feet to the fire,” declared Rep. Fred Upton (R-Mich.), one of the members who had sought a firm connection between tax cuts and deficit reduction. The version of the bill approved by the House Ways and Means Committee made no connection between the tax cuts, estimated to cost $189 billion over five years, and a balanced budget.

The separate issue of whether families with incomes of up to $200,000 should qualify for a $500-per-child tax credit remains a sticking point, although House Republican leaders predicted that the entire plan is close to passage.

“We’re close and confident--in the end, we’ll be there,” said House Speaker Newt Gingrich (R-Ga.). He predicted that the bill is within six votes of the 218 it will need to command a majority of the House membership.

The proposed tax cuts, which are cornerstones of the House GOP “contract with America” campaign manifesto, have been hailed by their supporters as good medicine for the economy and good news for working Americans.

Critics have attacked it from several directions.

House Democrats and the Clinton Administration have complained that its benefits would be skewed toward the rich. Many Republicans have voiced worry about its impact on the economy and the deficit.

Vice President Al Gore, beginning a weeklong White House assault on the Republicans’ first 100 days in control of Congress, denounced the GOP tax plan as a “royal rip-off” and “Robin Hood in reverse.”

The top 1% of taxpayers, earning $350,000 or more, would get an average of $20,000 a year in breaks, Gore said. Taxpayers with incomes of $10,000--skirting the poverty line--would get $90 a year.

“Take from the kids, take from education, take from protecting our water, take from all the programs that actually help our hard-working, middle-income American families and give it to the wealthiest in the country,” he said.

Sen. Bob Packwood (R-Ore.) criticized the proposed $500-per-child tax credit as “terrible tax policy, terrible economic policy” on grounds that it would encourage consumer spending instead of household savings, which is what many economists believe the economy needs. Packwood is chairman of the Senate Finance Committee, which will have a chance to rewrite whatever tax bill the House passes.

Packwood and other key GOP lawmakers, along with an increasing number of Senate Democrats, have expressed a desire to enact spending cuts before granting tax relief.

A group of House Republicans had sought to link passage of the tax cuts to a specific schedule of spending reductions that would take the deficit to zero by the year 2002. The challenge by the deficit hawks had delayed the tax-cut plan and exposed rifts within Congress’ new Republican majority.

Under Monday’s plan, House leaders agreed to a diluted version of the demand that precise spending cuts, large enough to balance the budget in seven years, accompany the tax bill. The compromise would merely set a path toward a balanced budget and require Congress to pass sufficient spending cuts each year to stay on the path.

The House and Senate Budget Committees would monitor progress toward a balanced budget, report on any deviations from the path and propose measures necessary for getting back on track.

Defenders of the compromise insisted that it would differ from past budget deals and genuinely shrink the deficit.

“I would say that the concerns that these folks had have been addressed,” said House Budget Committee Chairman John R. Kasich (R-Ohio). “This says we will not have tax cuts unless we are good to our word” on spending cuts.

*

Separately Monday, Gingrich and Senate Majority Leader Bob Dole (R-Kan.) announced the creation of a a “National Commission on Economic Growth and Tax Reform”--all but ensuring a vigorous debate during the 1996 presidential campaign on the emotional issue of tax fairness.

The nine-member commission, which is to make its recommendations by the end of September, is chaired by Jack Kemp, an ardent champion of the flat tax, which would levy the same tax rate on most individuals and businesses.

Past proposals to impose a flat tax generally have set the rate at between 17% and 19%, but skeptics have said that the rate might have to be 25% or higher to avoid adding to the deficit.

“We have asked Jack to re-examine the entire 9,000-page federal tax code: to start with a blank piece of paper and design a system that is flatter, fairer and simpler,” Dole said at a joint press conference with Gingrich and Kemp.

Dole conceded that a flat tax is an idea that has been around for decades without gaining popular support. But he added: “We think the time is ripe, maybe this is the time to really put it together--as a replacement, not an add-on to the present tax code.”

Kemp, a former GOP congressman and secretary of Housing and Urban Development, agreed wholeheartedly. “The rate reduction in a flat tax would have not only efficiency and simplicity,” he said, “but would spur the economy to levels that grow new jobs that would absolutely broaden the tax base and ultimately raise more revenue.”

Dole and Gingrich each will name four members to the nine-seat commission, in addition to Kemp as chairman, and said they will consider Democrats for the panel.

Among other champions of a flat-tax are House Majority Leader Dick Armey (R-Tex.) and several GOP senators, including Arlen Specter of Pennsylvania, who, like Dole, is a candidate for the Republican presidential nomination.

President Clinton during the early stages of the 1992 campaign, lambasted the flat tax, which was promoted by one of his then-rivals, former California Gov. Edmund G. (Jerry) Brown Jr.

Flat-tax backers, including Nobel economist Milton Friedman say that the tax is both more equitable and more efficient--and would do away with special-interest tax breaks that now proliferate as well as double taxation of earnings on dividends and inheritances.

A flat tax is “the best way to liberate the American economy,” Armey said last week during a session on the topic. He is scheduled to testify on Wednesday at a Senate Finance Committee hearing on the tax.

Flat-tax critics fear that it would shift the burden disproportionately from the wealthy to the poor and the middle class.

Treasury Secretary Robert E. Rubin also warned recently that a simplistic flat tax would reduce government’s ability to apply public-policy leverage through the tax code.

In other developments on Capitol Hill on Monday:

* The Senate passed and sent to Clinton legislation to continue the expiring tax deduction that the self-employed can take for the cost of their health insurance policies. The bill retroactively extends the 25% deduction, which expired last year, and raises it to 30% next year.

The House approved the final legislation last week but the Senate balked when Democrats objected to the elimination of a provision that would have closed a loophole allowing wealthy Americans to evade federal income taxes by renouncing their U.S. citizenship. The Democrats were not able to get the provision put back into the bill. The measure also stirred controversy because, to pay for the extension of the insurance deduction, it would repeal tax incentives that encourage media companies to sell broadcast properties to minorities.

The Democrats never intended to block the bill, they said, wanting instead to hold it up long enough to score debating points about GOP tax policies and how they are biased in favor of the rich--in this case the handful of “Benedict Arnold billionaires” who, in the words of Minority Leader Tom Daschle (D-S.D.), “manipulate their citizenship to avoid paying taxes.”

The bill was eventually passed by unanimous voice vote and the Senate plunged back into a bitterly partisan debate over spending cuts and their impact on the poor.

* The House moved to clear the decks for this week’s showdown over tax cuts by passing legislation to create a financial control board to take charge of the District of Columbia’s nearly bankrupt finances. Passed unanimously, the measure moves to the Senate, which is expected to approve it this week.

Times staff writers Michael Ross, Paul Richter and James Risen also contributed to this story.