President Bush yesterday effectively killed any remaining prospects for a budget deal built around higher tax rates for the wealthiest taxpayers in exchange for a cut in capital gains taxes, but only after he again appeared to reopen the issue to negotiation, only to pull back hours later.
Trying to end two days of confusion and disarray in his administration, Bush said he favored a new top tax rate of 31 percent and a cut in the effective capital gains rate to 15 percent. But he said there was no chance the Democrats, who favor taxing the wealthiest taxpayers at 33 percent, would accept his terms and told House Republicans it would be a "waste of time" to try.
"I do not believe such a compromise is now possible," Bush said in a statement issued by the White House. "Indeed I'm quite concerned that pursuing it in the current context may not only fail, it may legitimize something farther to the left that we cannot accept."
On Capitol Hill, Democrats and Republicans continued to shape alternatives to the deficit-reduction package that was soundly defeated last week. The two sides appeared headed for a bruising, partisan fight as they struggled to meet an Oct. 19 deadline for a new plan to cut the deficit by $500 billion over five years.
House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) unveiled parts of a Democratic tax plan that will be offered next week as an alternative to a proposal approved by the committee Wednesday night. The plan includes raising tax rates on the wealthiest taxpayers from 28 percent to 33 percent and a 10 percent surtax on income of more than $1 million.
The confusion kept the Senate Finance Committee immobilized most of yesterday as Senate leaders sought a way to proceed. A bipartisan approach is virtually mandated by the panel's 11 to 9 split between Democrats and Republicans. Further, panel member Bill Bradley (D-N.J.) is unlikely to support any measure that alters current tax rates, which he helped set in 1986.
In an effort to limit the political damage caused by his apparent flip-flop on the tax issue, Bush sought to clarify his position yesterday by explaining his terms for a deal built around tax rates and capital gains, which he first raised on Tuesday and then appeared to withdraw.
There was a mini-replay of Tuesday's confusion yesterday. It was set off by Rep. Bill Archer (R-Tex.), who met with Bush and other senior Republicans yesterday morning and then announced to reporters the president's position favoring a 31 percent income tax rate and a 15 percent capital gains rate. But the White House quickly issued the statement saying that because Democrats had refused to accept this proposal in private negotiations earlier, Bush didn't believe it was worth fighting about now.
"It will distract us to continue this discussion," Office of Management and Budget Director Richard G. Darman later told the Senate Governmental Affairs Committee. "We ought to put it aside . . . . I don't believe it can be negotiable on acceptable terms."
House Republicans are considering an alternative proposal that would include the terms outlined by Bush yesterday. But the president, in a meeting with GOP members of the House Ways and Means Committee, expressed the prevailing view inside the White House that such a proposal is a fruitless exercise.
"If they can get that done, fine," Bush said. "I think it's a waste of time because I just don't think it can get through both houses of Congress."
Bush said he was inflexible on the 31 percent top rate, saying that he "will not tolerate 'bursting the bubble' by raising the top marginal rate on the wealthiest taxpayers from 28 to 33 percent." He said that would "start us back on the path toward higher income tax rates for everyone."
The White House performance yesterday drew fresh criticism from Democrats. "Our president has now taken more positions on taxes than Nadia Comaneci," said Rep. Lawrence J. Smith (D-Fla.).
Even Rostenkowski, one of Bush's closest friends in Congress, sounded dismayed. "I'm sorry the president is starting to look that bad," he said. "This is a time the American people want some leadership."
After two days of headlines and television reports battering the president for creating confusion on the tax issue, White House officials said they regretted not moving sooner to put out the fire.
Nervous Republicans continued to watch the White House's performance with increasing concern about its impact on the party.
Sources said that at yesterday morning's meeting between Bush and senior Republicans, Rep. Guy Vander Jagt (R-Mich.), chairman of the House GOP campaign committee, told White House Chief of Staff John H. Sununu that the week of focus on the budget had been a "disaster" for GOP candidates around the country and for the president, based on his committee's polling. He said GOP candidates needed a "Republican" budget position of less taxes and less spending that they could run on.
Sununu, a source said, argued that what GOP candidates needed was "a success for the president" -- a final budget deal so that Bush could claim to have helped solve the deficit problem. Some Republicans fear that Bush and his top aides will now take a deal largely on Democratic terms in order to put the issue behind them.
Bush tried to turn the political fight in a new direction yesterday, saying "it isn't true" that the GOP favors the rich over the poor. "That's the age-old Democrat cry of favoring the rich," he said. "The American people want to favor growth and they want to favor jobs, and they don't believe all this handout mentality."
The tax proposal that Bush said he favored yesterday grows out of an anomaly in the 1986 tax reform act, in which the richest Americans have a top tax rate of 28 percent, while those just below the wealthiest have a top rate of 33 percent.
Bush said, in essence, that he would be willing to flatten this "bubble" with a 31 percent rate. Archer, the ranking Republican on Ways and Means, said that would mean a tax cut for roughly 4.5 million Americans and an increase for roughly 500,000 Americans with taxable incomes over $240,000.
However, an analysis of the proposal prepared yesterday by Congress's Joint Committee on Taxation showed that when a 31 percent rate is coupled with Bush's 15 percent capital gains tax proposal, the plan would cost $19 billion over five years, with the wealthiest benefiting most. Taxpayers with incomes greater than $200,000 would have their taxes reduced by 6.6 percent, while those between $100,000 and $200,000 would have theirs reduced by 5.2 percent. Taxpayers with incomes below $100,000 would have their taxes reduced, but by smaller percentages.
Senate Finance Committee members last night appeared to be nearing agreement on a bipartisan package that would omit from a plan devised by Chairman Lloyd Bentsen (D-Tex.) the swap of a 33 percent income tax rate for the wealthiest in return for Bush's proposed capital gains tax cut. To make up the lost revenue, the plan would limit the federal deductions those earning more than $100,000 a year could claim, according to documents obtained last night.
In the House, the Ways and Means Committee's 23 Democrats met into last night to draft their alternative tax plan. Yesterday, they agreed to make significant changes designed to increase the tax burden on the wealthy and ease it on the middle class.
In addition to the proposed surtax on millionaires and the higher top rate, the committee Democrats agreed to raise the alternative minimum tax rate on the wealthy who take a large number of deductions and exclusions from 21 to 25 percent. They also agreed to raise the amount of income subject to the 1.45 percent Medicare payroll tax from $51,300 to $100,000.
The lawmakers also voted to drop the proposed 2-cents-a-gallon tax on refined petroleum products and to ease the proposed increase in the current 9-cents-a-gallon gasoline tax from 10 cents to only 3 cents.
The panel Democrats also voted to limit the cut in Medicare benefits to $43 billion. The amount that beneficiaries in the voluntary program covering physicians and hospital outpatient services must pay before receiving benefits would go from $75 to $100, not the $150 envisioned in the budget summit agreement. The Democratic plan would also ease the rate of increase for the premiums that the beneficiaries of the program must pay.
Bush yesterday showed interest in the tax plan approved Wednesday night by the full Ways and Means panel, saying it appeared to preserve aspects of the bipartisan summit agreement that he and his top advisers still favor.
Darman caught the spirit of the past several days during his congressional testimony. Asked about the White House statement clarifying Bush's stance on tax rates, Darman replied: "I have no idea what White House statement was issued, but I stand behind it 100 percent."
Staff writers Ann Devroy, Steven Mufson and John E. Yang contributed to this report.