In a battle of political symbolism and simple mathematics, congressional leaders and Bush administration officials negotiating a deficit-reduction package struggled yesterday to overcome the last major stumbling block on taxes: how to squeeze more revenue from the wealthiest Americans.
At issue is whether to boost taxes on the very richest directly by placing a surtax on their incomes, as the Democrats propose, or indirectly by limiting the benefits of the income tax deductions they claim, as Bush administration officials and GOP lawmakers want.
The matter is complicated by the inability of House Republican leaders to guarantee that a majority of their members will vote for whatever deal is struck. That would require strong Democratic support for any deficit-reduction package to clear Congress.
House Democratic leaders planned to present their members with options for ending the impasse at a closed meeting this morning, officials said. The Democrats and the administration are about $5 billion apart on proposed reductions in projected Medicare spending, with Democrats pressing to limit the five-year savings to about $43 billion.
As bargainers waited hour after hour for computer analyses of various tax plans yesterday, the House cleared the way for expedited consideration of another omnibus stopgap spending bill on Wednesday. The government's current temporary spending authority expires at 12:01 a.m. Thursday, threatening a second shutdown of the federal government this month.
At the same time, the government's statutory debt limit would drop, making it impossible for the federal government to borrow money. For the second time in a week, the Treasury yesterday postponed a government securities auction.
Passage of a stopgap spending measure will be necessary to prevent another government shutdown Thursday unless Congress has enacted a deficit-reduction plan by then. That did not appear likely yesterday.
Though the talks have narrowed the differences, finishing remained difficult. "Everybody has given so much on both sides that they think, 'I'm not going to go that last mile,' " said Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.)
House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) said, "We're just moving figures around and trying to find a piece of legislation that can pass both houses. What we can pass, they can't. What they can pass, we can't."
There were, however, hints of movement. Yesterday, Democratic negotiators met with top administration officials for the first time in weeks. They remained closeted in meetings until late last night and plan to resume talks today.
Both Democratic and administration bargainers have agreed that the wealthiest Americans should help bear the burden of deficit reduction by paying higher taxes. Democrats have proposed either leveling off the top two marginal income tax rates at 31 percent and imposing a 7.5 percent surtax on those with more than $1 million in income, or evening out the top two rates at 32 percent without a surtax.
Administration officials and GOP lawmakers would prefer to raise taxes on the richest taxpayers by disallowing deductions equal to 4 percent of an individual's or couple's adjusted gross income in excess of $99,000 and 8 percent of the income that exceeds $1 million. One administration official described the plan as a "disguise" for a tax rate increase.
Both plans would raise the effective income tax rates for the richest taxpayers. But they would have very different political impacts. Although he has abandoned his "no new taxes" campaign pledge, President Bush has tried to maintain an anti-tax image by vowing not to accept a top rate higher than 31 percent or a surtax on the wealthy.
Further, governors and mayors of big cities oppose limiting deductions, fearing it would make it more difficult to raise state and local taxes, which can be deducted from federally taxable income. High-tax states such as New York and California also have big House delegations that have vowed to oppose any deduction-limiting plan. "The percentages in that hurt us in big states," Rostenkowski said.
In order to entice Democratic votes from those states, a deficit-cutting package would probably have to include either a 32 percent top rate or the surtax on millionaires, according to House Democratic leadership aides.
Under the administration plan, based on a proposal by Rep. Don J. Pease (D-Ohio), if a person had $200,000 in income and $25,000 in deductions, the plan would disallow $4,000 of those deductions and raise the individual's tax bill by $1,240.
Democrats argue that it would be simpler and more direct to raise tax rates. Republicans say trimming deductions is better tax policy.