Surplus Whets GOP Appetite for Tax Cuts

Emboldened by the latest surge in the federal budget surplus, House Republican leaders Thursday announced plans to seek sweeping across-the-board tax cuts for all taxpayers, as well as large reductions in taxes on capital gains, inheritances and married couples.

The proposal is the opening gambit in a debate that until recently many thought would produce only political rhetoric and not a real tax cut.

Hopes for a tax cut have been given fresh life by revised budget projections this week from White House and congressional analysts, along with new indications that President Clinton would accept more tax cuts as part of a compromise on Social Security and Medicare.

“We’ve gone from debating whether to have a tax cut to how big it should be,” Rep. Michael N. Castle (R-Del.) said. “The opportunity is there.”

Giving lawmakers more room to maneuver, the Congressional Budget Office on Thursday ratified the White House’s assertion Monday that the federal surplus over the next decade will be even larger than analysts had predicted a few months ago.

To be sure, big political obstacles remain before the two parties bridge their differences over the size and scope of any tax cut. Indeed, Republicans do not even agree among themselves about how to use the budget windfall.

Ways and Means Chairman Bill Archer (R-Texas), the lead House tax writer, wants all the unanticipated surplus to provide an even larger tax cut than Republicans previously had planned. That means the bill his committee is about to produce could propose a tax cut of $1 trillion over the next 10 years, up from the $778-billion reduction called for in the GOP budget earlier this year.

“The only reason for this surplus is because taxpayers are paying too much, which is why they deserve a refund,” Archer said Thursday at an elaborately staged GOP leadership pep rally featuring balloons, flags and a fife and drum corps.

House GOP leaders have said that they agree with Archer in principle but are facing resistance from other Republicans who do not want to expand the tax cut. Many Republican moderates, for example, want to use the additional surplus not just for tax cuts but also to reduce the national debt, ease expected cuts in domestic programs or provide some margin for error in future budgeting.

“To not leave some leeway is foolhardy,” Castle said.

And the two congressional Budget Committee chairmen--Rep. John R. Kasich (R-Ohio) and Sen. Pete V. Domenici (R-N.M.)--Thursday declined to endorse a $1-trillion tax cut. Kasich said that Republicans should not commit all the newfound money to tax cuts until they have figured out how much would be needed to shore up Social Security and Medicare.

Nevertheless, Democrats said that the overall GOP push for a bigger tax cut is a signal that Republicans are more interested in appeasing their political base than in crafting legislation Clinton might sign.

“This is an indication of what their priorities are and that there is not any chance for a compromise,” said House Minority Leader Richard A. Gephardt (D-Mo.). “How can you compromise when they get new numbers and they run out immediately with a fife and drum corps . . . saying they want to spend over a trillion dollars on a tax cut for the wealthiest Americans?”

But there are stirrings of bipartisanship in the Senate, where Finance Committee Chairman William V. Roth Jr. (R-Del.) is reaching across the aisle and several Democrats are pushing their own party to support a tax cut, given the increased budget surplus.

“The surplus has grown to the extent that it is not only possible, there is a responsibility to reduce taxes,” said Sen. Robert Torricelli (D-N.J.), who is co-sponsoring a $350-billion middle-class tax cut with Sen. Paul Coverdell (R-Ga.).

Coverdell, urging his GOP colleagues to take that more modest approach, argues that a $1-trillion cut would be sure to be vetoed.

“We have a decision to make,” Coverdell said. “Do we align ourselves behind a symbolic statement on our view of the level of taxation . . . or do we fashion a doable measure?”

The battle begins in earnest early this month, when Archer’s and Roth’s committees are expected to draft tax-cut bills. That will lay the groundwork for the real haggling this fall, when the prospects for an agreement will hinge on forces that reach far beyond the tax debate. It is widely assumed that tax cuts will come as part of a larger agreement on shoring up Medicare and Social Security, both politically explosive issues. And whether there is enough trust or leadership in Washington to cut such a deal remains to be seen.

As this year began, Clinton had drawn strict battle lines on tax cuts. He insisted on buttressing Social Security first and demanded that future tax cuts not be financed with the budget surplus. On Monday, in announcing that the federal budget deficit would be $1 trillion more over the next 15 years than the White House estimated in January, Clinton signaled more flexibility and opened the door to additional tax cuts if his other priorities--fixing Social Security and Medicare--are met first.

He did not, however, offer any changes in his initial $250-billion, 10-year tax-cut package, which would provide tax subsidies for targets such as retirement savings and day-care expenses rather than broad-based tax cuts.

Republicans outlined their budget priorities after receiving the Congressional Budget Office’s revised budget analysis, which projected surpluses smaller than the administration did. However, the congressional analysts still found that the surplus would be almost $300 billion more over 10 years than they had predicted earlier this year.

Archer on Thursday provided only the broad outlines of the bill he plans to bring before his committee but his comments provided the first substantive glimpse of what shape a GOP-sponsored tax cut might take.

While Clinton’s tax-cut proposals are narrowly focused on particular targets, Archer said that the cornerstone of his bill would be relief for all taxpayers.

“While giving only targeted relief may have a political appeal to some, it would be wrong to deny relief to everyone who made this surplus possible,” Archer said.

An aide said that leading options being considered include an across-the-board income tax cut of 1% a year over 10 years. Another would be to change income tax brackets to allow more taxpayers to qualify for the lowest 15% bracket.

Other elements of Archer’s proposal would:

* Reduce the so-called “marriage penalty,” a quirk in the tax code that forces some married couples to pay more income taxes than they would if they filed as individuals. The bill is expected to tackle the problem gradually over a number of years by increasing the standard tax deduction for couples.

* Reduce inheritance taxes. Congress in 1997 eased inheritance taxes by raising from $600,000 to $1 million the amount of an estate that is exempt from taxation. But Republicans--backed by small businesses and farmers who complain that they often have to sell off inherited businesses and land to pay estate taxes--are lobbying for more relief.

* Cut taxes on dividends and other capital gains, a perennial GOP proposal that Republicans say would boost economic growth.

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Times staff writer Stephen Fuzesi contributed to this story.