Top-level congressional and White House budget negotiators yesterday tentatively agreed on a tax package that would neither cut the capital gains tax rate as President Bush had pledged in his campaign nor increase individual income tax rates, officials familiar with the proceedings said.
The tentative agreement contains other provisions that attempt to satisfy both Bush's desire to spur the economy with tax breaks for investments and the Democrats' objective of making sure the rich equitably share the burden of deficit reduction without violating other principles strongly held by the two sides. Late last night, some Democrats remained concerned over the fairness of the plan.
Bargainers had said that if the tax issue were settled, an agreement could be reached quickly on the rest of a five-year plan designed to cut the federal budget deficit by $500 billion, $50 billion of it in the 12 months that begin Monday, and that disruptive across-the-board spending cuts could be prevented.
Other thorny issues remain, though. Negotiators, who met through the night and into this morning, had yet to resolve the politically precarious question of whether and how to achieve savings from Social Security, officials said.
As the talks resumed yesterday afternoon, House Speaker Thomas S. Foley (D-Wash.) said, "I'm getting quite optimistic about it."
"We're always optimistic," said White House Chief of Staff John H. Sununu, who canceled plans to accompany Bush to the United Nations to remain in the budget talks.
In New York last night, White House press secretary Marlin Fitzwater said Bush had received an update on the budget talks shortly before 9 p.m. from Sununu. "On the basis of that conversation . . . it could still go either way. We are not sure yet of an agreement," Fitzwater said.
If an agreement is reached overnight, Bush is expected to return to Washington today to join in announcing it.
Failure would threaten automatic cuts under the Gramm-Rudman-Hollings law that could eventually total $105.7 billion, interrupt government services and furlough more than 1 million federal workers, who have been told to report for work Monday but may then be sent home.
The tax compromise reached yesterday would try to spur economic growth by allowing tax deductions of up to $50,000 for investments in new businesses with $50 million or less in equity and providing a tax incentive for investments in economically depressed areas, officials said. In exchange, taxes would be raised on the wealthy by limiting the benefit of their federal tax deductions.
Such a deal would allow each side to claim a victory without giving up other positions: Bush would get his tax incentives for investment without having to agree to raise income tax rates, and the Democrats would be able to do something to keep the tax burden from further shifting from the wealthy to the middle class without having to accept a cut capital gains taxes.
The months-long stalemate over taxes was broken when Bush administration bargainers dropped their demand to cut capital gains taxes, through either an outright cut in the effective tax rates or an adjustment in tax calculations to account for inflation.
Democrats had resisted Bush's call to cut the effective tax rate on capital gains, calling it a break for the rich, and demanded that it be linked with an increase in the tax rate on the wealthiest Americans, currently 28 percent.
In turn, the president and congressional Republicans had adamantly opposed any increase in income tax rates.
With the tax issue apparently settled, there remained the question of whether and how to save money from Social Security in order to meet their target of saving $120 billion over five years from benefits programs.
Democrats have proposed increasing the amount of higher-in-come recipients' benefits that are subject to taxation from 50 percent to as high as 85 percent. Bargainers appeared to be moving away from an administration proposal to cut by as much as 16 percent next year's cost-of-living increase for all inflation-linked federal benefit programs, including Social Security, veterans' benefits and federal retirement programs, officials said.
Social Security has long been the third rail of American politics: Lawmakers fear that if they touch it, they will die. The elderly make up one of the most potent political blocs. Last year, they pressured lawmakers to repeal an expansion of Medicare to cover catastrophic illnesses just one year after it had been enacted.
Congressional leaders would like to have a budget deal in hand before the House and Senate consider a stopgap funding bill, called a continuing appropriations resolution, to keep the federal government operating beyond midnight tonight.
The House and Senate have scheduled sessions today to take up the measure. The prolonged deadlock over the budget has meant that not one of the 13 regular spending bills to fund the government in fiscal 1991 has been enacted.
As the talks continued through the weekend, Office of Management and Budget Director Richard G. Darman and Senate Majority Leader George J. Mitchell (D-Maine) found some common ground.
The two New Englanders have often been at odds but are united in their fervor for the Boston Red Sox, currently battling the Toronto Blue Jays for the American League Eastern Division championship.
Friday night and again yesterday afternoon, a television set outside the negotiating room was tuned to the Red Sox-Blue Jays game. Few details of the talks have seeped out of that room, but a cheer escaped Friday night when the Red Sox won in the bottom of the ninth inning to take the division lead.
Staff writer Ann Devroy in New York contributed to this report.