President Reagan yesterday authorized his economic advisers to draw up possible tax increases beginning in fiscal 1986 if needed to bring down huge projected budget deficits, administration officials reported.
While the president withheld a decision on the provisional tax increase idea, he was described as receptive after a morning meeting at which his advisers, led by Treasury Secretary Donald T. Regan, made the case for tax increases in later years.
The administration is said to be "fluid" on what tax increases to propose, but officials said that Regan had ruled out two that had been discussed before: wiping out the deductions for state sales taxes and mortgage interest on second homes.
The administration officials are proposing a "contingency plan" in which the tax increases would take effect only if the deficit seemed likely to exceed some fixed percentage of gross national product--perhaps 1 or 2 percent--in the fiscal years between 1986 and 1988 when the economy would presumably be recovering. This would translate into deficits of $50 billion to $100 billion.
Current administration estimates are that, without further action, the deficit would rise to $295 billion by 1988. This would be equivalent to more than 5 percent of GNP.
Administration officials fear that such large deficits, if included as projections in the fiscal 1984 budget proposal Reagan will send to Congress on Jan. 31, would jolt the money markets and keep long-term interest rates high, endangering economic recovery.
Thus, the tax increase proposals are viewed by some administration officials as a way to show a declining deficit path now, without contradicting Reagan's remark last week that it would be "wrong" to raise taxes during a recession.
Administration officials said yesterday that the president is determined to keep intact both the third installment of his three-year tax cut this July and the scheduled 1985 indexing of the income tax to keep rates from rising with inflation.
"Indexing is not on the table," an informed administration source said.
Although Reagan just a few weeks ago ruled out any tax increases for fiscal 1984, he reacted differently yesterday, displaying what this administration source described as a realization that the deficits in later years must be reduced.
The Treasury Department was told to come up with specific tax increase proposals partly to reduce the uncertainty in the scheme.
"You'd want to be specific," in the fiscal 1984 budget, one official said. "Why keep the whole country in suspended animation?"
Administration officials said that one reason the tax idea is attractive to the president is the "what if" nature of it. The president, as well as Treasury Secretary Regan and some other economic advisers, believes the economy will recover faster than currently projected, the officials said.
If this happens, the tax increases might not be necessary.
Also yesterday, White House officials scheduled another meeting on the defense budget. Defense Secretary Caspar W. Weinberger was said to be resisting any sizable reductions from the $285 billion in budget authority for fiscal 1984 projected for the Pentagon.
One White House official said he believed that the president would back Weinberger despite the urgings of other officials that the Pentagon's five-year buildup should be scaled back to help "share in the burden" of controlling deficits.
Administration officials said the $33 billion in domestic budget cuts that Reagan has currently approved includes retrenchments not only in so-called discretionary spending--programs subject to the annual appropriations process in Congress--but also in entitlement programs, where money is paid out automatically each year to everyone who meets fixed criteria and is thereby entitled to a grant. The largest such program is Social Security.
Administration sources also said there would be no further extension from this weekend of the reporting time for the president's divided Advisory Commission on Social Security, which is supposed to come up with a way to save that program.
"We either have it the commission report or we don't," said one official. "The budget has to be put to bed."
The budget must be sent to the printers by week's end, although Reagan is not due to submit it to Congress until the end of this month.
The White House has been carrying out secret talks with members of the president's commission in recent weeks in hopes of finding a mix of tax increases and benefit cuts acceptable to both political parties and the president. Another bargaining session is scheduled to be held today.
Noting the reluctance of Sen. William L. Armstrong (R-Colo.) to endorse a compromise that would speed up scheduled tax increases, one administration official said: "If we get a wide enough center, nobody can afford not to go along."
On the plan to increase other taxes in later years, administration officials said Treasury Secretary Regan supports partial taxation of health insurance contributions by employers, which could raise as much as $9.7 billion a year by fiscal 1986.
Contributions over some set amount would be treated as income and taxed; they are all untaxed fringe benefits now.
This proposal is, however, an initiative of the Department of Health and Human Services, where it is being portrayed more as an effort to control medical costs than as a tax increase, administration officials added.
Taxation of employer health insurance payments is sure to be opposed by organized labor, because such a tax would fall on many union members, and by the insurance industry, which provides the coverage.
According to the Congress' Joint Committee on Taxation, taxing all employer contributions in excess of $150 a month for each family would raise $9.7 billion in 1986 and $12.3 billion in 1987.
If the cap were raised to $200, the revenue would fall to $6.3 billion and $8.9 billion in the two years; raising the tax-exempt level to $250 a month would reduce revenues to $3.7 billion and $5.2 billion, respectively.
If the administration rules out elimination of the deduction for state and local sales taxes, it will have lost a potential source of $6.6 billion in 1986 and $7.5 billion in 1987. The amount of revenue lost from taxpayer deduction of interest on second homes is minor.
These are just a few of a long list of tax increase proposals that are under consideration in the administration and in Congress. Most have been around for years. They range from a broad energy tax to restrictions on depreciation of real estate.
A $2-a-barrel tax on imported petroleum would raise $4.2 billion annually by 1986, and a $5 tax would raise $9.9 billion. Taxing both domestic and imported oil would about double the amount raised.
Other tax alternatives and the amount they would raise in 1986 include the restriction on real estate depreciation, $4 billion; modification of the foreign tax credit, in excess of $1 billion; doubling the tax on liquor, $2.7 billion; and placing a ceiling on non-mortgage interest deductions of $2,000 on a joint return, $1,000 on a single return, $3.4 billion.