Treasury Secretary Donald T. Regan indicated for the first time yesterday that the administration might be willing to drop one important part of last year's tax-cut bill--the provision "indexing" taxes to inflation after 1984.
But Regan said the administration would only be willing to withdraw the protection from income tax "bracket creep" if Congress agrees to use the increased revenues to reduce the federal budget deficit.
"If you want higher revenues to spend, that's a no-no as far as we're concerned because we don't want more spending by the federal government; we want less spending by the federal government," Regan said in an interview on "Newsmaker--Saturday" (Cable News Network).
Regan's signal that the administration might be willing to compromise on indexing came on a day when senior White House advisers had an inconclusive first session with a team of governors to negotiate differences over the president's proposal to shift control of federal programs to the states.
Up until now the administration had resisted pressure from worried leaders on Capitol Hill calling for changes in tax and budget policy to bring down deficits. Congressional budget experts have singled out President Reagan's plans for a large-scale military buildup and the indexing provision, which is scheduled to take effect in the 1984 budget year, as primary causes of the escalating deficits forecast in coming years.
The treasury secretary made it clear yesterday that the administration still regards as "out of bounds" the three-phase tax cut that leads up to the start of indexing. Some in Congress have urged the president to postpone the final 10 percent tax cut scheduled now for July 1, 1983, but Regan said he believed that to do that would abort recovery of the economy.
He said, however, that the administration would consider removing the indexing provision, which Reagan had described in his State of the Union address as a significant innovation that would take away "government's built-in profit on inflation and its hidden incentive to grow larger at the expense of American workers."
Regan said: "Indexing we'd discuss. It wasn't part of the president's original package. It was something he wanted at a later date."
The secretary also said the administration would be willing to discuss changes in the controversial leasing provision of last year's tax bill that allows profitable companies to buy tax credits from losing firms. But Regan said the administration wants to defer discussion until after the Treasury Department completes a study later this month "of actually what happened last year to leasing after the Congress passed that bill."
Brushing aside the alarms sounded by the Business Roundtable on the size of the deficit and the administration's handling of the economy, Regan said, "Well, it's always darkest before dawn. And as you know, businessmen traditionally when they see falling sales or falling profits in their own industry, naturally get very myopic as far as the economy as a whole is concerned."
Meanwhile yesterday, Senate Minority Leader Robert C. Byrd (D-W.Va.) said he did not believe the Reagan administration was willing to compromise on the budget but he did see an indication that the administration's supporters in Congress are recognizing "the necessity in making changes."
"What we saw last year was a solid wall of 53 partisan Republicans marching in lockstep with David Stockman Office of Management and Budget director and the White House," Byrd said. "This year, we already see Republicans in disarray."
Stockman, White House chief of staff James A. Baker III and intergovernmental liaison Richard Williamson yesterday negotiated with the team of six governors on the president's federalism initiative.
Vermont's Richard A. Snelling (R) led the team, which included the state leaders from Arizona, Georgia, Illinois, Tennessee and Utah.
The governors clung to their firm opposition to Reagan's plan to transfer the welfare and food-stamp programs to the states, but were anxious to negotiate details of his offer for the federal government to take over Medicaid. The White House advisers declined to consider Medicaid separately yesterday.
Participants reported progress on other, less disputed aspects of the complex proposal. Williamson did not rule out the possibility that the federalism legislation the White House sends to the Hill this spring might be less extensive than originally outlined in the president's State of the Union address.
The meeting with the governors was the first of a series of sessions scheduled by the White House to build a broad consensus of support for the idea. State legislators are to conduct similar sessions on Monday, followed by representatives of cities, towns and counties on Tuesday with the governors returning for a second round later in the week.