Clinton Vetoes What He Calls ‘Bloated’ GOP Tax Cut Bill : Budget: Serenaded by brass band, president carries out threat and kills $792-billion package. He urges distrustful Republicans to negotiate.

President Clinton vetoed the $792-billion GOP tax cut Thursday, setting the stage for a high-stakes showdown with Republicans in Congress over tax and spending priorities--and a ripe political issue for the coming election year.

Speaking in the White House Rose Garden as he administered his long-threatened veto, Clinton urged his GOP adversaries to “work together” with him by devoting most of the budget surplus not to a huge tax cut but to debt reduction and long-term Social Security and Medicare reform--while settling for a more modest tax cut of about $300 billion.

“We must put first things first,” the president declared.

The White House staged Thursday’s veto ceremony with a festive air, complete with a brass band. The upbeat ambience seemed to reflect the belief among administration officials that Clinton again will get the better of his GOP critics.

In 1995-96, Clinton and Republicans were mired in such a prolonged budget impasse that it forced parts of the government to shut down, which the public blamed on GOP recalcitrance. In 1997, a year-end budget deal blew a $20-billion hole in the budget ceilings--and was widely seen by Republican conservatives as a Clinton victory.

“Republicans feel that in past negotiations they have always come in second place,” said Rick May, former staff director of the House Budget Committee. “They perceive that they do not do a very good job in these negotiations.”

To be sure, the White House and the GOP-led Congress have reached significant compromises, such as the 1996 welfare reform law, minimum wage increase and expansion of medical insurance coverage.

But the GOP’s deep and visceral distrust of Clinton remains.

As House Speaker J. Dennis Hastert (R-Ill.) put it Thursday: “One of the things we don’t want to do is to get caught in a situation where we’re giving the American people minimum tax cuts for maximum spending.”

While Clinton fervently urged them not to “throw in the towel” and go home, GOP leaders scorned his invitation as an empty gesture.

“Never once has he offered any constructive help,” Hastert said.

Still, senior White House aides said that the standoff may not be quite so intractable.

The GOP plans to draft a Medicare reform bill in the fall, a move that White House Chief of Staff John Podesta said could “begin to open things up” and provide “the framework” for a compromise on an array of issues.

For now, however, Republicans intend to concentrate on passing the 13 annual spending bills in time to adjourn for the year in late October.

Clinton brings a different set of motivations to the confrontation.

The legacy-minded, lame-duck president would love to preside over Medicare and Social Security reform.

But he also may be content to rest on his laurels, taking credit for having ended a generation of deficit spending, having ushered in unprecedented prosperity and, in the words of one top staffer, having “prevented the squandering of the surplus.”

If Republicans refuse to negotiate, Clinton is prepared to publicly chastise the GOP-controlled Congress for behaving irresponsibly by quitting instead of doing the public’s business. Such a bully pulpit campaign, so the thinking goes, could also help elect Al Gore president and put Congress back in the hands of Democrats.

The bill that Clinton vetoed, the 26th of his presidency, would have cut inheritance and capital gains taxes, eased taxes on married couples and reduced tax rates for the lowest bracket from 15% to 14%. The tab was $792 billion over 10 years. Clinton has proposed more targeted middle-class tax cuts totaling about $300 billion over the same period.

Clinton said that the GOP bill was “too big, too bloated” and would return to the days of “deficit upon deficit, quadrupling the national debt, leading to high interest rates, eventually bringing us the worst recession since the Great Depression.”

On the other hand, he added, “our hard-won prosperity gives us also the chance to do something few people ever have: the chance to invest our surplus to meet the long-term challenges of America.”

Podesta and other senior White House aides said that the president intends to “press hard” for action on Medicare this fall by the Senate Finance Committee, as chairman William V. Roth Jr. (R-Del.) has promised.

“That’s the first [issue] in the chute,” Podesta said.

Serious substantive issues, however, divide both sides over how to reform Medicare, especially on the reach of a new prescription drug coverage benefit. Clinton would like to make it universal. The GOP wants the benefit only for the needy.

In the Rose Garden, the president specifically brought up Medicare--and offered something of an olive branch.

“Now I don’t expect the Republican majority to agree with me on every detail of my plan. I never thought that would be the case,” he said.

Senate Majority Leader Trent Lott (R-Miss.) said after Clinton’s veto that the GOP “will be back” in another year with a broad tax-cut package.

For the rest of this year, however, the only GOP initiative on tax cuts is likely to be modest efforts to revive portions of the bill Clinton vetoed. For instance, the House Ways and Means Committee is scheduled to vote today to renew and expand business tax credits for research and development and other targeted tax breaks.

Also Thursday, as Clinton was vetoing the GOP’s tax-cut bill, a House subcommittee drafted an $84.9-billion appropriations bill that essentially guts the president’s major education proposals and funds existing programs--and most health programs--at or near what Clinton sought. Congressional Democrats blasted the bill. Clinton said he would veto it.

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Times staff writer Art Pine contributed to this story.