Budget talks between top congressional and White House officials intensified yesterday as administration bargainers modified their demand for a cut in the capital gains tax rate, changing it to a proposal to adjust capital gains tax calculations to reflect inflation, officials familiar with the proceedings said.
In nine days of high-level talks, Democratic congressional leaders and administration officials have narrowed differences on a variety of issues in their pursuit of a five-year, $500 billion deficit-reduction agreement that would save $50 billion in the fiscal year that begins Monday.
"We are a little bit in the precincts of reaching a conclusion rather than in the wrap-up stage," House Speaker Thomas S. Foley (D-Wash.) said. "It is down to focusing on a few issues . . . There has been a great deal that has been agreed to tentatively."
"We're so close and yet not quite there," said House Minority Leader Robert H. Michel (R-Ill.) as he left the Capitol early this morning after hours of talks ended. The bargainers are set to meet again today.
One of those issues still not settled is the shape of the tax component in a final budget agreement. The negotiating deadlock has been centered on President Bush's insistence that the capital gains tax rate be cut and the Democrats' counterdemand that any reduction in that rate, which they contend would disproportionately benefit the rich, be linked to an increase in the income tax rate on the wealthiest taxpayers from 28 percent to 33 percent.
But now, according to sources, administration negotiators have scaled back their tax position to a demand to index capital gains to reflect inflation on investments made after the plan becomes law. Such a step would effectively lower taxes on future capital gains by exempting from taxation that portion of a new asset's value that increases solely because of inflation.
"That's now the bottom line," a congressional official said.
But it was not clear last night whether the administration's new position would break the deadlock over taxes. Democrats argued that the indexing scheme would also benefit the wealthy and said it would have to be matched with a tax increase on such people.
Last night, bargainers were considering a combination of raising the income tax rate on the top taxpayers, limiting federal income tax deductions and increasing the $51,300 upper limit on income subject to the 1.45 percent Medicare payroll tax, officials said.
Rather than placing an upper limit on deductions, as the administration had earlier proposed, the plan being considered yesterday would reduce taxpayers' deductions by a percentage of the amount of their income that exceeded a certain threshold. Democrats said that was preferable to capping deductions because it would not discourage certain activities such as charitable contributions or home-buying.
The bulk of the tax package has been tentatively agreed upon. It includes an 8-cents-per-gallon increase in the gasoline tax, already 9 cents per gallon; a broad-based energy tax; and a 10 percent tax on such luxury items as expensive automobiles, boats and electronic equipment.
The two sides have narrowed the gap on cuts in benefit programs, which Democrats have sought to protect. "We're close to closure," House Budget Committee Chairman Leon E. Panetta (D-Calif.) said last night.
The biggest cut would come from Medicare, which would be pared by $60 billion over five years, officials said. The premiums beneficiaries pay for the voluntary coverage of physicians and outpatient hospital services, which currently cover 25 percent of the program's anticipated costs, would be increased to cover 30 percent. A proposal to link the premiums to participants' incomes was dropped.
An unresolved issue is what savings will be achieved from the politically sensitive Social Security program. Democrats have proposed increasing the amount of higher-income recipients' Social Security benefits that are subject to taxation while the administration has sought to pare next year's cost-of-living increases, officials said.
Currently, single Social Security recipients with adjusted gross annual incomes of more than $25,000 and married recipients filing jointly with incomes of more than $32,000 must pay taxes on half of their benefits. The Democratic proposal would raise the amount subject to taxation to 85 percent.
As the bargaining continued on Capitol Hill, Bush yesterday campaigned for GOP candidates in the Midwest. He blamed Democrats for the prolonged budget stalemate and warned of delayed Social Security payments if Monday comes without a budget deal and the massive across-the-board spending cuts mandated by the Gramm-Rudman-Hollings law take effect.
"There may be senior citizens wondering why their Social Security checks are late," he told a Minneapolis fund-raising breakfast. Later, in Cleveland, he said, "Let this be the last time the American taxpayer is forced to witness a fiscal fiasco."
Bush said he was trying "not to sound defensive" as he lashed out at Democrats. Recounting the past five months, he said Democrats had called on him to make a sacrifice by agreeing to put taxes on the table in the talks. "It's like making me eat broccoli," he said.
In the House, though, Democrats criticized Bush for being on the campaign trail instead of in the negotiating room. "If the president of the United States spent as much time in Washington raising money for the country as he did for Republicans . . . there would be no deficit at all," said Rep. Lawrence J. Smith (D-Fla.).
"George Bush, phone home," said Rep. Dennis E. Eckart (D-Ohio).
Without a budget agreement or congressional enactment of a stop-gap measure to continue funding, which the House and Senate are set to consider in rare Sunday sessions, the government will be shut down Monday, the start of fiscal year 1991.
Such a shutdown would throw out of work all "nonessential" employees until a budget measure is passed. The decision on who is "nonessential" is left to each agency and department.
Because the budget process has become so intertwined with the stalemate over how to meet the requirements of the Gramm-Rudman-Hollings deficit-reduction law, agencies and departments have made few, if any plans, for a shutdown.
The last time the government closed for lack of funds was Oct. 17, 1986, and that interruption lasted only several hours.
Joseph C. Brown, acting personnel director at the Commerce Department, said the department has asked employees to listen to news media reports on the budget negotiations over the weekend.
"Obviously that may lead to some confusion, but I don't know how to avoid that," he said. "It's a very unsettling and disruptive situation."
Yesterday, spokesmen for several departments said that if there's no funding agreement on Monday, most employees will be sent home. In the past, employees have been paid retroactively, once the budget was passed, for the time they were off due to a shutdown.
Only "essential" employees, "those that protect life and property and those necessary to begin phasedown of other activities" will be allowed to stay, a board category that each department and agency is left to interpret on its own, according to a 1981 attorney general's opinion still in effect.
Staff writers Dan Balz, traveling with the president, and Steven Mufson contributed to this report.
No Appropriations Bill
Each year Congress must pass 13 appropriations bills to fund the federal government for the fiscal year beginning Oct. 1. To date, none of the bills has passed in final form. If Congress fails to approve a stop-gap appropriations measure called a "continuing resolution," the government will shut down Monday due to lack of funds. -- Result
A small number of "essential employees" would remain on the federal payroll, but all others would be sent home. In the past, employees have received pay retroactively for the hours they were out of work. No Deficit Agreement
Congress and the administration also must agree to cut the deficit, as specified by the Gramm-Rudman-Hollings law. If they can't agree by Oct. 1, automatic spending cuts called "sequestration" will take effect on Monday. -- Result
1.1 million employees who have received notices could expect to be furloughed. Continuing Resolution with Furlough Provision
Congress also is considering a continuing resolution that would fund the government until Oct. 20 and defer furloughs, but President Bush has said he will veto such a measure. -- Result
If Congress could override the president's veto, this alternative would mean no shutdown and no furloughs until Oct. 20. Continuing Resolution Only
Another option under consideration is a continuing resolution that would fund the government until Oct. 20 but would allow furloughs to begin Oct. 1. -- Result
The government would not shut down, but 1.1 million civilian employees could expect to be furloughed.