Treasury Secretary Donald T. Regan said yesterday that President Reagan will veto any bill cutting back on the 10 percent income tax cut scheduled for July 1, and it appeared that Democrats lack the votes even in the House to override him.
Testifying before the House Ways and Means Committee about a proposal by House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.) to limit the tax cut to $700 per return, Regan stressed the administration's opposition to any move increasing tax liabilities over the next two years.
Though budget deficits are thought likely to be in excess of $175 billion for the next year or so, Regan said, "it is of the greatest importance that we not jeopardize the recovery by tax increases now."
The administration, he said, continues to support a "contingency" income surtax and excise tax on oil if deficits remain high in 1986 but "any tax increase before then, particularly any limitation on the third year of the tax cut, would be the wrong medicine for the economy."
Ways and Means Chairman Dan Rostenkowski (D-Ill.), who said that sustaining economic recovery in the face of $200 billion deficits "is like trying to walk up a down escalator," asked Regan if he still believed it "appropriate" to defer any tax increases to 1986.
"I do," he replied. "It's not needed. The deficits can be handled."
Regan said he would be willing to work with Congress on a joint program to increase revenues and cut spending, but he refused to offer any revenue proposals beyond the contingency taxes. He said there is no truth to reports that the administration will propose a "consumption tax" as a broad-based revenue measure.
He strongly attacked the proposed cap on next month's tax cut, saying "it's not soak the rich," as portrayed by the Democrats, but "drown the middle class."
Of the 8 million returns that would be affected by a $700 cap, he said, 48 percent are filed by single individuals and married couples who earn less than $50,000 a year.
O'Neill later issued a "fact sheet" attempting to rebut the specific examples cited by Regan of how the tax-cut cap would hit middle-income taxpayers. But it appeared that he and House Majority Leader James C. Wright Jr. (D-Tex.) were having difficulty holding the Democrats in line, despite a straw vote taken by O'Neill last week showing strong Democratic support for his plan.
A group of 79 House Democrats released a letter they wrote to O'Neill saying that "while we listened with interest to your proposal to cap the third year of the tax cut, our feeling is that taking such action without any accompanying cap on spending is flawed policy."
Rep. James M. Shannon (D-Mass.), a key Ways and Means member, said "you could never get" a two-thirds vote needed to override a veto in the House, let alone in the Republican-controlled Senate. "The House would vote for the cap today," Shannon said, "but there's just not that intensity of feeling about it."
Several Democrats have expressed doubts about the political wisdom of voting for a cap that would be portrayed by the Republicans as a tax increase but would cut the federal deficit by only about $6 billion.
"The cap is a symbolic gesture that's bound to fail," said Rep. Sam M. Gibbons (D-Fla.), a senior Ways and Means member. "I'm not going to participate in a futile gesture."