White House and congressional budget negotiators yesterday continued to seek a compromise on a tax package to break their impasse over a deficit-reduction agreement that would avert massive across-the-board spending cuts on Monday.
The bargainers remained stuck over two issues that have divided them since President Bush took office: the president's insistence to cut capital gains taxes and the Democrats' contention that more of the tax burden has shifted from the wealthy to the middle-class, officials familiar with the proceedings said.
"If we could solve this principal problem . . . we have so much of the other package well on the way to resolution that I think it would come together quite quickly," said House Speaker Thomas S. Foley (D-Wash.).
The talks stretched into last night and are to resume today in hopes of agreeing on a five-year deal to cut the deficit by $500 billion, including $50 billion in the fiscal year that begins Monday. Failure would threaten to disrupt government services beginning Monday, when cuts mandated by the Gramm-Rudman-Hollings law would take effect.
"We'll keep working as long as it takes," said House Majority Leader Richard A. Gephardt (D-Mo.).
Late yesterday afternoon, the Office of Management and Budget said that even if the two sides do not reach agreement and the cuts and government shutdown take place, all federal employees, even those who were expected to be furloughed Oct. 1, should instead report to work Monday. If no stopgap funding measure is passed by Monday, "nonessential" personnel will be sent home during the first three hours of the day.
Negotiators were searching for a way to reconcile Bush's desire to reduce capital gains taxes -- through either an outright cut in the tax rates or an adjustment in capital gains tax calculations to account for inflation -- and the Democrats' drive to make sure the pain of deficit-reduction is spread equitably, officials said.
Democrats argue any cut in capital gains taxes would disproportionately benefit the wealthy and must be linked with higher taxes on the rich. Further, Democrats argue that taxes on the rich must be raised to equitably spread the burden of deficit reduction. They contend that middle-class taxpayers are disproportionately affected by the higher excise taxes on alcoholic beverages, cigarettes and gasoline that bargainers have tentatively agreed upon.
Yesterday, the two sides exchanged new capital gains proposals. Democrats proposed setting the top capital gains tax rate at 22 percent in exchange for raising the income tax rate on the wealthiest Americans from 28 percent to 32 percent, officials said. Administration officials offered to set the top at 31 percent if the top capital gains rate were lowered to 19 percent. Additional revenue in each plan would be generated by limiting income tax deductions for the wealthy.
Capital gains are currently taxed at the same rate as regular income. It was not clear where the proposals stood last night.
For many Democrats, the issue has become a question of being able to claim some sort of political victory from a budget deal. They see many other provisions that have been tentatively approved, including cuts in Medicare and holding a wide array of domestic spending to the projected rate of inflation, as going too far to satisfy the administration and congressional Republicans.
Rep. Ronald V. Dellums (D-Calif.), chairman of the Congressional Black Caucus, has urged his colleagues to vote against any budget agreement that "further savages already decimated programs in housing, health care, education and job training."
Lawmakers in both parties acknowledged it would not be easy to muster enough votes to pass whatever agreement may be reached. "There's no pleasure in this package," Gephardt said. "It's not a happy package when you're trying to cut the deficit by this much. . . . But if all of us just focus on the individual negative factors, then we're going to miss the forest for the trees."
"Everybody wants something to pass, but very few people want to vote for it," said Sen. Phil Gramm (R-Tex.). "We've got a lot of heavy lifting to do."
One target for savings that is likely to cause political pain is Social Security. Bargainers are examining the politically sensitive program for additional savings needed to reach the target of $120 billion pared from benefit programs over five years.
Democrats have proposed increasing the amount of higher-income recipients' Social Security benefits that are subject to taxation from 50 percent to 85 percent.
The administration has proposed instead to cut next year's cost-of-living increase for inflation-linked federal benefits, including Social Security, veterans' benefits and federal retirement programs.
At a meeting yesterday, House Republicans told their leaders they would prefer reducing cost-of-living adjustments than taxing more of the benefits. "Nobody wants taxes," said House Minority Leader Robert H. Michel (R-Ill.). "Taxes increase year after year."
Meanwhile, House Democratic leaders made preparations for considering a stopgap, omnibus spending bill in a rare Sunday session to keep the government funded.
They also raised the possibility of pressing a Democratic budget if there is not bipartisan agreement. "That should not be read in any way as diminishing in any sense our determination to have an agreement," Foley said, calling the planning "prudent."
"We're going right to the wire," said House Budget Committee Chairman Leon E. Panetta (D-Calif.). "There's a point at which we have to have an agreement or go our separate ways."
Staff writers Steven Mufson and Dana Priest contributed to this report.
Many components of a five-year, $500-billion deficit-reduction plan that would save at least $50 billion in the fiscal year beginning Monday have been tentatively agreed upon: TAXES
About $130 billion of the five-year deficit-reduction would come from new taxes, including:
Raising the federal gasoline tax to 17 cents a gallon from 9 cents a gallon.
Higher excise taxes on alcoholic beverages, cigarettes and airline tickets.
A new 10 percent tax on the amount that the purchase price of new automobiles, boats and yachts exceeds $30,000, jewelry exceeds $5,000, electronic equipment exceeds $1,000 and furs exceeds $500 and the entire purchase price of private aircraft lighter than 5,000 pounds.
A broad-based tax on fuels based on their energy content. BENEFIT PROGRAMS
About $120 billion of the five-year savings would come from benefit programs, including: The biggest cut, $60 billion, from Medicare. Premiums paid by beneficiaries for the voluntary coverage of physicians and outpatient services, which currently cover 25 percent of the program's anticipated costs, would be increased to cover 30 percent, saving $30.7 billion over five years. This year's $28.60 monthly premium would rise to $34.32. In addition, the program's deductible would double from $75 to $150 and grow in future years to match inflation, saving $8.8 billion over five years. MILITARY SPENDING
About $170 billion of the five-year savings would come from Pentagon accounts. DOMESTIC DISCRETIONARY SPENDING
Non-military programs subject to annual appropriations would be held to the projected rate of inflation. MAJOR UNRESOLVED ISSUES TAXES
President Bush wants to reduce taxes on capital gains. Democrats argue this would disproportionately benefit the rich. In addition, Democrats argue that taxes on the rich must be raised to equitably spread the burden of deficit reduction. They contend that middle-class taxpayers are disproportionately affected by higher excise taxes. BENEFIT PROGRAMS
Social Security: Democrats have proposed increasing the amount of higher-income recipients' Social Security benefits that are subject to taxation. 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.
The administration would prefer to cut next year's cost-of-living increase for all inflation-linked federal benefits, including Social Security, veterans' benefits and federal retirement programs.