White House, GOP Reach Deal to Balance Budget, Cut Taxes

The Clinton administration and GOP congressional leaders reached agreement Monday on a five-year plan to balance the budget and cut taxes for families, students, investors and the working poor.

Details of the package were made available by Republican congressional strategists Monday evening, apparently in an effort to get a jump on the administration in announcing the plan.

Moments later, White House aides traveling with President Clinton in Las Vegas said the president was “very pleased” with the accord and would be fully briefed on the details this morning.

Treasury Secretary Robert E. Rubin, who led the administration’s negotiating team, called the accord “a very good balanced-budget plan.”

And White House Chief of Staff Erskine Bowles told reporters: “We couldn’t be more pleased with the outcome.”

House Speaker Newt Gingrich (R-Ga.), praising negotiators for both sides, portrayed the budget pact as only the beginning. “We were already talking today about a tax-cut bill next year,” he told reporters.

The agreement follows weeks of cat-and-mouse negotiations in which the two sides dug in their heels for days until finally deciding it would be in both parties’ interests to come to an accord quickly.

The final version of the tax-and-spending plan, designed to balance the federal budget by 2002, still must be approved by majorities in the House and Senate.

Included in the package is a Clinton proposal to spend $24 billion over the next few years to provide states with funds to finance health insurance for some of the 10 million children not now covered by any health care plan.

The measure would be financed partly by a 15-cent-a-pack increase in the cigarette tax. The Senate version of the bill had sought to boost this by 20 cents a pack, but the extra 5-cent rise was dropped. The increase would come in two stages. The cigarette tax would increase by 1O cents-per-pack in 2000; the remaining nickel would be added in 2002.

Republicans apparently conceded on another key Clinton demand: that welfare recipients required to work under the new welfare reform law be paid minimum wage and be covered by federal workplace laws.

Negotiators have also agreed to cover all 700,000 elderly and disabled legal immigrants on the welfare rolls last August, when the welfare reform bill was passed, and many who have become disabled since then.

The two sides resolved differences over the tax-cut package by expanding the size of the cuts to $91 billion over the next five years--up from $85 billion in previous versions--and broadening many key cuts.

The compromise tax measure, described by congressional strategists Monday, contains these major elements:

* A $500-per-child tax credit that both sides had endorsed will be fixed at $400 in 1998 and $500 in 1999 and beyond, and will apply to children under the age of 17, rather than 12 as Clinton initially wanted.

In a compromise, Republicans agreed to extend the credit to working-poor families earning $18,000 a year or more, rather than the $24,000-a-year threshold they had sought.

At the same time, the White House agreed to make the credit available to single parents making as much as $75,000 a year and families with incomes of up to $110,000 a year, rather than phasing it out at $60,000, as the president had sought.

* The maximum tax rate on capital gains--profits from the sale of stocks or other assets--will be cut to 20%, down from 28% now, and drop to 18% in 2001 for taxpayers who hold their assets for five years or more. The change is retroactive to May 7.

At the same time, the so-called bottom rate, which applies mainly to older investors earning less than $41,200 per couple, will drop to 10%, from 15% now, and to 8% for assets held five years or more.

Republicans shelved a plan to “index” such gains to account for the effects of inflation. Clinton had warned that he would veto the entire bill if that provision were included.

* The maximum inheritance that can be passed on to family members tax-free will rise to $1.3 million in January in the case of family-owned businesses or farms. That is up from $600,000 now.

The exclusion for other estates will remain at $600,000 next year, rising gradually to $1 million by 2007.

* A tax break for homeowners who sell their principal residence, enabling them to exempt the first $500,000 in profits from capital gains taxes. It would apply to houses sold after May 7, 1997.

* The compromise would create so-called Hope Scholarship tax credits to cover college costs, amounting to a 100% credit on the first $1,000 of tuition and books, plus a credit totaling 50% of the next $1,000.

* The bill provides for three special new individual retirement accounts, including one that would allow early withdrawals for first-time home buyers and others designed to help parents save for college costs.

Although details were sketchy, White House officials said taxpayers would be able to place up to $2,000 in saving into these accounts each year and qualify for deferring taxes on them.

Those who qualify for the family child credit also would be able to place up to $500 per child into an IRA.

* The current 10% airline tax would be reduced to 9% in 1998, dropping gradually to 7.5% over the next three years. The bill also imposes a fee of $2 per flight segment beginning Oct. 1, rising to $3 in 1998.

In addition, the measure will quadruple the current $6-a-person departure fee on international flights, boosting it to $12 each way.

The president was playing golf at Las Vegas Country Club with pro basketball star Michael Jordan when he was called by one of his senior advisors and told about the deal, according to White House spokesman Joe Lockhart. Clinton “was looking forward to a full briefing” upon his return to Washington today, Lockhart said.

The president specifically asked whether his aims had been met on three of his priority initiatives: tax relief to help pay for college, a child tax credit and the expansion of health insurance for children.

He was told that “all three had been done to the president’s satisfaction, so the president was gratified,” Lockhart said.

Clinton has made the battle over the welfare provisions--which have been pushed by organized labor--a high priority, and he reaffirmed his determination Monday at a meeting of the National Governors’ Assn.

The president wants states to make welfare workers eligible for both the minimum wage and a federal tax credit for the working poor--both rights that now are reserved for those with employee status.

“I feel very strongly about that . . . I don’t think we ought to do anything that would undermine that incentive” for welfare recipients to work, Clinton told the governors.

But some governors have warned that such a requirement will make it vastly more difficult and expensive to prepare the nation’s poorest and least employable welfare recipients for work in the private sector.

Governors from both parties stressed that they were not against paying welfare recipients the minimum wage, but were worried that requiring employers to pay Social Security and unemployment taxes would make hiring unskilled workers too expensive.

“We’re trying to get nonprofits, charities and businesses to take a risk and hire these folks,” Gov. George Allen (R-Va.) said. “What we ought to do is to knock down the burdens, not put up more burdens.”

Gov. David Beasley (R-S.C.) warned that such requirements also will hurt states. “This will gut South Carolina’s welfare program,” Beasley added. “This is intolerable to us.”

Pine and Healy reported from Washington; Shogren reported from Las Vegas. Times staff writer Edwin Chen in Washington contributed to this story.

* EFFECT ON STOCKS: Wall Street isn’t too worried about a sell-off when the capital gains tax is lowered. D1

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Finding the Tax Breaks

Highlights of the tax and budget accord reached Monday in Washington:

PARENTS: A $400-per-child tax credit in 1998, rising to $500 in 1999 for children 16 and under. It would apply to many families who earn as little as $18,000 and to single parents making as much as $75,000 and couples making $110,000.

HOME SALES: First $500,000 in gain from the sale of principal residence would be excluded from taxation, but this benefit could be used only once every two years. This would be retroactive to May 7, 1997.

INVESTORS: Retroactive to May 7, 1997, the capital-gains rates would drop from a maximum 28% to 20%, and from 15% to 10% for the lowest income bracket. Lowest rate would drop to 8% for assets bought beginning in 1997 and held five years; top rate would drop to 18% for assets bought beginning in 2001 and held five years. Inflation-related portion of capital gains would be taxed, despite GOP effort to exempt it.

INHERITANCES: An increase in the estate-tax exemption for family-owned businesses and farms from $600,000 now to $1.3 million, beginning in January. Beginning next year, the exclusion for other estates will rise to $1 million by 2007.

IRAs: Several new Individual Retirement Accounts, although they will be limited to people with incomes of $150,000 or less. People could put money into as many IRAs as they would like, but could invest an annual total of no more than $2,000 overall. New IRAs include letting people qualify even if spouse does not, plus new tax breaks for withdrawals for education and first-time home purchases.

HIGHER EDUCATION: Around $40 billion in tax credits and deductions, including penalty-free withdrawals from Individual Retirement Accounts for education expenses, interest deductions from student loans and a Hope scholarship tax credit for up to $1,500 for tuition and related expenses for the first two years of college. The maximum credit would be $1,500 for the first two years. The second two years of college, the credit would start at 0 and increase over time to $2,000.

POOR CHILDREN: Expand health-care coverage for many of the 10 million children not covered by insurance. The five year plan to expand health care will cost $24 billion. It is unclear what services that state would be required to provide.

SMOKERS: The current 24-cent-per-pack levy on cigarettes would increase by 10 cents in 2000 and an additional nickel in 2002. Some of the money would go toward the $24-billion needed to pay the health-care costs for poor children.

HEALTH CARE PROVIDERS: Most of the approximately $140 billion in five-year savings came from Medicare, whose growth would be trimmed by $115 billion, or about 12%. Most savings would come from reducing payments to hospitals, doctors and other health-care providers, though the current $43.80 monthly premium for coverage of doctors’ bills would grow slowly. Lower Medicaid payments to hospitals would generate about $13 billion in savings.

WELFARE RECIPIENTS: The president is demanding that welfare workers receive the minimum wage and other employee protections. Welfare coverage will be restored for some 700,000 elderly and disabled legal immigrants and children who lost coverage under last year’s welfare overhaul.