White House and congressional negotiators were considering increasing federal taxes on tobacco last night as they embarked on what they hoped would be the final phase of budget talks.
Bargainers said that while slow progress was being made, major differences remained on the details of a five-year, $500 billion deficit-reduction plan that would save $50 billion in the first year.
They convened at the Andrews Air Force Base Officers' Club yesterday morning and, after a brief late-afternoon break for House and Senate votes, returned last night and vowed to remain until agreement was reached or until the talks break down. They recessed early this morning and announced that they would reconvene at 8 a.m. today.
"The mood is fairly positive, fairly upbeat," said Rep. Bill Archer (R-Tex.), the House Ways and Means Committee's ranking Republican. "But we are a long way from reaching an agreement until some major issues are resolved."
"We're just grinding away," said House Budget Committee Chairman Leon E. Panetta (D-Calif.). "We had to get to the tough questions, and now we're there."
A small group of the negotiators spent much of yesterday working on one of the toughest issues facing them: whose taxes to raise.
Democratic and Republican bargainers held another spirited debate over President Bush's goal of cutting the tax rate on capital gains and the Democrats' contention that the wealthy should bear a greater burden of taxes, according to sources familiar with the proceedings.
House Speaker Thomas S. Foley (D-Wash.) said yesterday that "it would be extremely difficult to accept the capital gains tax" cut without also raising taxes on the wealthy. Democrats argue that cutting the capital gains tax rate would disproportionately benefit the rich.
An offer by Democrats to drop their proposal to raise the income tax rate on the wealthiest Americans was contingent upon the administration dropping its capital gains tax cut, sources said. In addition, Democrats doubled to 20 percent their proposed surtax on those with incomes higher than $500,000, the sources said.
"Any increase in rates is going to be a problem on the Republican side," said Archer.
The bargainers also discussed raising the federal excise tax on tobacco, although it was not clear who formally proposed this, the sources said. "It's floating around in the air and both sides are waiting to see if it drops from the sky," Panetta said.
The tobacco industry's powerful lobby is certain to wage a strong fight against any increase in the excise tax. In addition, there are close Senate races this fall in the tobacco-growing states of North Carolina and Kentucky whose senators can be expected to lead opposition to a tax increase.
Doubling the current 16-cent-per-pack federal tax on cigarettes would generate $2.8 billion in new revenue next year and $13.8 billion over five years, according to the nonpartisan Congressional Budget Office.
Bargainers have agreed to raise $25 billion in new taxes and federal fees in the fiscal year that begins Oct. 1 and between $130 billion and $145 billion over five years, the sources said.
Negotiators have tentatively agreed to extend several minor taxes that are set to expire, including the 3 percent excise tax on telephone service that is due to lapse on Dec. 31. Renewing that would generate $1.5 billion next year and $12.9 billion over five years, according to the CBO.
Republican and Democratic proposals each also include differing proposals to increase taxes on alcoholic beverages and to tax such luxury items as expensive automobiles.
Testifying before the Senate Banking Committee yesterday, CBO Director Robert D. Reischauer said the fiscal 1991 deficit appears to be $30 billion to $35 billion higher than it did in June because of the weakening economy and rising oil prices. The CBO's June deficit projection was $232 billion.
Also yesterday, the General Accounting Office reported that the Gramm-Rudman-Hollings deficit-reduction law has not been effective in reducing the deficit. The report said the total federal debt, including money owed to Social Security and other trust funds, could climb as high as $5 trillion by 1995, up from the current $3 trillion level.
Staff writer Ann Devroy contributed to this report.