Senate Majority Leader Howard H. Baker Jr. (R-Tenn.) yesterday suggested a federal income surtax as one way of financing a military buildup while reducing deficits, and congressional budget leaders said President Reagan's red ink budget is all but dead on Capitol Hill.
While even Baker aides characterized the surtax idea as just a "trial balloon," the proposal--and others that surfaced as Congress returned from a one-week recess--underscored mounting congressional determination to try to bring down interest rates by reducing budget deficits.
Although Baker did not go into details, other sources said a temporary surtax of 5 percent or 10 percent is being "discussed" among Senate Republicans. They said a 10 percent surtax would raise about $37 billion to help offset, or at least meet, the projected $91.5 billion deficit for next fiscal year.
That surtax would virtually wipe out the 10 percent tax cut that Congress has approved for this year, although technically it would leave the Reagan tax program in place. It also would be raising taxes for another of Reagan's top priorities: defense.
"It's a signal that we need to look at every idea out there . . . that something's got to be done," said a Senate Republican leadership aide.
Initial reaction from administration officials was cool, but they did not immediately pop the balloon.
Budget director David A. Stockman said a defense surtax was "one of the more creative proposals" that Congress has made, although he questioned such earmarking of tax revenues. Treasury Secretary Donald T. Regan also expressed reservations but did not dismiss the proposal outright, as he did another congressional budget alternative last week.
Instead of returning from their week at home with a newfound appreciation for his budget, as Reagan had said he hoped they would do, the lawmakers came back with many possible alternatives, including:
* A proposal from House Majority Leader James C. Wright (D-Tex.) for an 80 percent tax on interest exceeding 15 percent on any loan, coupled with a tax exemption for income from the first 3 percent of any loan whose terms are less than 10 percent. Wright also would shave military spending and scheduled tax cuts, and provide tax incentives for purchase of new homes and fuel-efficient American cars.
* A plan from Senate Budget Committee Chairman Pete V. Domenici (R-N.M.) that would cut defense spending increases by as much as $25 billion over three years, freeze appropriations for domestic programs at 1982 levels and cap basic benefit entitlement programs. Domenici also did not rule out some modification of the tax cuts.
* A suggestion from Sen. Russell B. Long (D-La.) to modify tax cuts scheduled for the next two years. Long would reduce the cut scheduled this July from 10 percent to 5 percent and make it retroactive to Jan. 1. He would make the tax cut scheduled for July, 1983, contingent on improved economic conditions, which he said would probably mean a deferral.
The returning congressmen also faced new criticism of the Reagan budget, including a blistering attack from the U.S. Catholic Conference, which said proposed cuts in welfare and other benefits are "intolerable."
"The churches cannot, by their charity, be mufflers of the harsh injustices imposed by an unresponsive government," said the Most Rev. Joseph M. Sullivan of Brooklyn, speaking for the conference. "The return of soup lines and the dramatic increase in the demands for emergency food assistance and financial aid should not be interpreted as signs of success for the 'New Volunteerism.' They are instead sad symbols of a retreat by government from a fundamental responsibility."
Proposed cuts in the food stamp program also drew a firm putdown from Sen. Robert J. Dole (R-Kan.), who heads the Finance Committee and the Agriculture nutrition subcommittee. While there will be some food stamp cuts to help reduce the deficit, "it's going to be very difficult this year to accomplish what's been proposed without impacting on the truly needy" and "if it does, it's not going to happen," Dole said.
As an alternative to cuts in programs for the poor, the Congressional Budget Office renewed suggestions of smaller cost-of-living increases for retirement programs and a tightening of tax loopholes. This could "spread the pain" of proposed cuts in food, income and health assistance for millions of Americans, CBO Director Alice Rivlin told a House Budget Committee task force.
The virtual death knell for the Reagan budget came in remarks from Domenici and House Budget Committee Chairman James R. Jones (D-Okla.) to the National Governors Association here.
"I don't think, as presently submitted to the Congress, that it has a signficant chance to become the budget resolution," Domenici said. There is "probably not a handful of Republican or Democratic" votes for it, Jones said.
House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) told Regan during a hearing on the budget: "Your budget is a weak and unrealistic response to our economic mess. Business has shown no sign of confidence and the general public is frightened about its future."
In outlining the surtax idea at a breakfast with Washington Post executives and reporters, Baker emphasized that he is not proposing it formally but putting it forward as "one of those things we have to consider." Jones immediately embraced the idea, noting he had proposed it earlier.
"We used to fuss at Lyndon Johnson about fighting the war in Vietnam on credit--guns and butter. Well, that's sort of what we're doing now," Baker said.