By Dana Milbank
Washington Post Staff Writer
Wednesday, September 5, 2001; Page A01

President Bush differed with Republican congressional leaders yesterday on a strategy for this fall's clash over the economy and the budget, declining to back a capital gains tax cut or to promise a veto of spending bills that cause the government to spend next year's Social Security surplus.

In meetings with Senate Republican and Democratic leaders returning from their August recess, Bush indicated he would not embrace a new push by congressional GOP leaders for a capital gains tax cut this year, diminishing prospects for a proposal that proponents say would stimulate the ailing economy and boost the shrinking government surplus.

Senate Minority Leader Trent Lott (R-Miss.) came to the White House with a proposal for a two-year reduction, from 20 percent to 15 percent, in the tax on gains from the sale of investments.

In remarks to reporters before his meetings, Bush sidestepped questions about whether he would veto spending bills that cause the government to tap into next year's Social Security surplus. Republicans on Capitol Hill have been urging Bush to make such a veto promise, fearing they will be accused in next year's elections of raiding Social Security funds.

Both issues reflect the different time horizons facing the Bush White House and Republicans in Congress. GOP officials said congressional leaders, eyeing the 2002 midterm elections, are eager to demonstrate to voters that they have an aggressive economic stimulus package and haven't broken promises to keep Social Security funds in a "lockbox."

At the same time, these officials said, Bush -- who is not up for reelection until 2004 -- believes his own stimulus package will be sufficient, and he doesn't want to make a promise on Social Security funds that he soon might be forced to break.

Bush's remarks came as members of Congress returned for what is likely to be a fierce battle this fall over the federal government's fiscal 2002 spending.

The $1.35 trillion, 10-year tax cut and a sluggish economy have sharply reduced surplus estimates for 2002 to $176 billion, of which only a billion or two is not part of the Social Security surplus. To prevent use of Social Security tax revenue, Congress may have to forgo plans to increase defense or education spending, or to cut spending elsewhere.

Senate Majority Leader Thomas A. Daschle (D-S.D.) also met with Bush. He said Democrats would not seek to revisit the tax cut, instead leaving to Bush the responsibility to reconcile the shrinking surplus with spending plans.

"We're not advocating that we roll back the tax cut," Daschle said in the White House driveway. He also vowed that "the Democrats are going to stay within the budget that we were given. . . . We have not spent a dollar more than what the president has requested so far this year on any bill or within the appropriations process itself."

Noting Bush's "desire" not to use Social Security surplus funds, Daschle said he does not see "a way out of this box" so far. "This is the president's budget," he said, "and we're looking to him for his guidance."

Republican lawmakers are eager to take a more aggressive position than Bush on an economic stimulus package to demonstrate that they have solutions to the ailing economy. But Bush, as one White House aide put it, "believes he has been successful so far on the issue of the economy" and is less eager for quick fixes.

"The difference is, congressional Republicans are worried about the economy, and want to make sure they get behind the economy and push it forward and define why the Democrats are different and the fact that Democrats don't have a plan," an aide to Lott said. "We have a reality check with the Dow consistently under 10,000 and people losing their jobs, and we want to do something about it."

The capital gains tax cut could ease the pressures on both sides, the aide said, noting that Sen. John F. Kerry (D-Mass.), a likely presidential candidate, had encouraging words about such a tax cut. Daschle, however, said he worried about the "long-term costs" of such a cut and expressed doubt that it would disappear after two years.

Bush pronounced himself "open-minded" about a capital gains tax cut, but he emphasized that he would "take a look-see" to determine whether his tax cuts do the job.

"Only half of our rebate checks have gone out, and the stimulus package that we all worked on prior to the recess is not fully in place yet," he said with Lott at his side.

White House press secretary Ari Fleischer said the administration would consider a capital gains tax cut for the "budget for 2003," not the one now before Congress. Lott, who said the president did not embrace his proposal, may attach the measure to a proposed minimum wage increase.

A cut in the capital gains tax would likely increase government revenue in the short term by encouraging people to sell property to take advantage of the lower rate, thus increasing the overall amount of taxes paid. Over time, some economists contend, the lower rates would reduce government revenue.

On the topic of Social Security funds, Bush, asked by reporters whether he would veto any spending bills that would tap the Social Security surplus, would not commit himself.

"I can say definitively every Social Security recipient is going to get their check," he said. "And, I can also say definitively, we've got ample money to meet our needs. And I can thirdly say, tax relief was the absolute right thing to do to make sure our economy grows." Pressed on the question of a veto, Bush demurred.