The Senate, opening debate on what would be the most sweeping overhaul of the tax code in more than 40 years, agreed in principle yesterday that new revenue generated by its proposal should not be used to meet deficit-cutting targets.
Budget Committee leaders raised strong objections to using some of the $23 billion in additional revenue expected in 1987 -- funds in excess of those current law would generate -- to meet such targets.
They noted that the bill would cause the deficit to soar in 1988 and 1989 as revenues declined by $21 billion below projected levels each year, if other tax increases were not approved.
"It would amount to deficit-reduction written in disappearing ink," Sen. Lawton Chiles (D-Fla.) said.
No votes were taken on amendments to the tax-overhaul legislation, which would cut the top tax rate for individuals almost in half, to 27 percent, and reduce the corporate rate by almost one-third, while curtailing numerous tax deductions.
By voice vote, senators adopted a resolution to devise an amendment to "deal with the budget fluctuations," without specifying how.
Majority Leader Robert J. Dole (R-Kan.) split with Chiles and Budget Committee Chairman Pete V. Domenici (R-N.M.), saying, "If you have revenues in the tax bill, why not use them? . . . . I don't think we'd need another tax bill."
Finance Committee Chairman Bob Packwood (R-Ore.) agreed to abide by the resolution. "You have my assurance I will be with you every step of the way to make sure the revenues are not used for phony deficit reduction," Packwood told Chiles and Domenici.
Packwood said later that the adjustments could involve amending the Gramm-Rudman-Hollings budget-balancing law so that the new revenue would not be counted against the deficit, effectively setting the money aside.
Sen. Lloyd Bentsen (D-Tex.) called for moving forward the tax-rate cuts in the legislation so taxpayers would receive rate cuts immediately. As the bill is now written, they would take effect six months after deductions are removed. A move forward would reduce the revenue surplus in the first year without bringing in more money in later years.
The first day of debate was marked mostly by praise for the legislation and its chief proponents: Packwood, ranking Finance Committee Democrat Russell B. Long (La.) and Bill Bradley (D-N.Y.).
Dole said the Senate could complete work on the bill by as early as next weekend, although others said that schedule is a bit optimistic, particularly because other work may keep senators from debating the bill again until Monday.
Packwood said 25 to 30 amendments to the bill had been filed as of mid-afternoon, although some might not be offered if major amendments are defeated early in the process.
A possible obstacle evaporated when Sen. John Melcher (D-Mont.) withdrew a threatened objection to consideration of the bill on grounds that its impact on farmers is not clear. Instead, he and others spent about an hour detailing their objections, to an empty chamber.
Several senators reiterated plans to propose amendments restoring the full deduction for Individual Retirement Accounts, which the bill would limit for workers covered by a company pension plan.
Amendments also are expected to restore deductions for charitable contributions by taxpayers who do not itemize deductions, to keep costs of business meals fully deductible, to restore low tax rates for capital gains and add a third tax rate of 35 percent.
Meanwhile, House Democrats indicated at a bargaining session on the fiscal 1987 budget that they may accept more money for defense in exchange for presidential support of a tax increase, and Domenici said he plans to meet with White House officials today to explore such an arrangement.
President Reagan has resisted tax increases and congressional efforts to cut his defense-spending request, although he recently stressed the defense issue more than taxes and some congressional Republicans have indicated that they expect him to be flexible on taxes as a last-resort to save his military buildup.
Reagan proposed $320 billion in fiscal 1987 spending authority for defense. The Senate proposed $301 billion and the House $285 billion.
The hint of a taxes-for-defense compromise came from Rep. Marty Russo (D-Ill.), a budget conferee who has taken a hard line on curtailing defense spending. "In order to go up on defense," he said, "we need revenues to do it. . . . We aren't going to go anywhere without some very strong leadership from the president."
Dole's opposition to tax-increase legislation, which some of his colleagues attribute in part to his presidential ambitions, did not deter Domenici and other Senate budget conferees from continuing to push for tax increases so more money is available for defense.
"I don't think that Dole's position is the best approach," Domenici said. As for himself and his Budget Committee colleagues, he said, "We're doing what we have to do." There is "no way," he added, that Reagan can get more for defense without tax increases.
The Senate budget calls for new tax increases of about $45 billion over three years; the House plan urges a similar increase, although Democratic leaders have said they will not push for higher taxes unless Reagan seeks them.