The House-Senate budget conference sputtered back to life yesterday as Senate negotiators proposed a tax increase to help reduce deficits, and House bargainers backed away from an idea floated by Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.) to tax Social Security benefits of upper-income retirees.
No agreements were reached, but the high-stakes talks on deficit reduction had resumed, and there was tentative agreement to meet again after Congress returns July 8 from its Fourth of July recess.
There also were signals that, under the right circumstances, the Senate might trade its demand for a freeze in Social Security benefits in exchange for other savings from benefit entitlement programs, breaking the impasse that led to collapse of the talks Tuesday.
Moreover, each side had exercised a little pre-recess political damage control. Senators, under attack for breaking off the conference, had gotten it back in business by embracing O'Neill's idea. And House members, by spurning it, had rescued Social Security from a compromise that might make it more difficult for them to campaign as protectors of Social Security.
But it was apparent from yesterday's frenzy of political maneuvering that the partisan point-scoring may not be over. House negotiators took pains to point out that the Republican-led Senate team was proposing tax increases despite President Reagan's opposition to the idea, while senators noted that House Democrats were "running away" from their speaker's Social Security idea.
The day started on an optimistic note as Senate Republicans huddled with Office of Management and Budget Director David A. Stockman to draft a compromise around what they had seen as an "offer" from O'Neill on Social Security.
Under O'Neill's suggestion, upper-income Social Security recipients -- individuals earning more than $25,000 and couples with incomes of more than $32,000 -- would pay taxes on 85 percent of their benefits rather than the current 50 percent.
The plan would raise $8.5 billion over three years, which, combined with other Social Security-related ideas under study by Senate Republicans, would come close to the $22 billion that a Social Security freeze would bring in over three years.
But, as the day progressed, it became apparent that House Democrats did not want their fingerprints on any seeming concession on Social Security. This left Senate Republicans in the unenviable position of trying to tax away Social Security benefits after having failed in trying to cut them.
So they didn't try. As the conference reconvened, Senate Budget Committee Chairman Pete V. Domenici (R-N.M.), describing O'Neill's idea as a "ray of hope" that had vanished, said he would have been prepared to build a compromise package around it "if it had been available." House Budget Committee Chairman William H. Gray III (D-Pa.) insisted that it was never an offer in the first place, and House Majority Leader James C. Wright Jr. (D-Tex.) said the House would consider it -- if the Senate proposed it.
House conferees renewed their offer to accept the Senate's proposed inflation increase for defense if the Senate would accept their inflation increase for Social Security, prompting Sen. Lawton Chiles (D-Fla.) to say this would perpetuate $200 billion deficits.
At this point, six of the nine Senate conferees -- three Republicans and three Democrats led by Slade Gorton (R-Wash.) and Chiles -- proposed a compromise that would cut deficits by two-thirds to $72 billion within three years by resorting to tax increases as well as spending cuts. Tax increases would comprise $60 billion of an estimated $360 billion in three-year deficit reductions. The proposal would continue the Senate's insistence on a Social Security freeze.
House members took the proposal under consideration, indicating they would respond after the recess. Domenici spoke favorably of the proposal but emphasized that neither he nor the Senate Republican leadership embraced it. Asked if he thought it would "break things loose," he said, "I don't know . . . but some hell will break loose."
In another development, budget director Stockman told a private dinner party earlier this month that the federal deficit has become intractable and that sizable tax increases may be the only solution "consistent with fiscal sanity," The New York Times reported today.
Stockman also said the administration, Senate Republicans and the House Democratic leadership had not "come clean" with the figures being used to calculate deficit reductions in the two conflicting budget proposals before Congress, the newspaper reported.
Stockman's remarks, a copy of which was furnished to The Times, came in an off-the-record address June 5 to directors of the New York Stock Exchange, their spouses and a few members of Congress. A spokesman for Donald T. Regan said the White House chief of staff had not heard of Stockman's remarks, the paper said.