The months-long budget impasse appeared broken yesterday as House Democrats chose compromise over confrontation with President Bush and embraced a deficit-reduction plan that does not include a special tax on millionaires.
Democrats, who had considered courting a presidential veto by pressing their plan to levy a surtax on millionaires, quickly pulled the package together yesterday morning after concluding that the issue had already brought them significant political and substantive gains.
"We've won on our basic issues," said Rep. Charles E. Schumer (D-N.Y.). "We haven't won everything, but we made it clear where we stand. . . You have to know when to hold them, know when to fold them. We've got a lot of winnings on the table."
Congressional leaders met to settle the final details of the package of tax increases and benefit program cuts which is part of a plan intended to save $500 billion over five years, including $40.1 billion in the current fiscal year that began Oct. 1.
At the same time, the Senate gave final approval to a temporary funding bill that would keep the federal government running at full force from 12:01 a.m. today, when current temporary spending authority ran out, through Saturday. The House earlier passed the bill on a 380 to 45 vote.
Bush, who was weighing the Democratic plan last night, said he would sign the short-term funding measure this morning before regular work hours, ensuring that all federal employees would report to their jobs as usual. It will be the fourth extension this month.
Early last night, the White House announced that the president had canceled the first day of a planned five-day western campaign swing that would have taken him to New Mexico and Arizona today.
The House Democrats' endorsement of the deficit-reduction package marked the apparent beginning of the final stretch in a tortuous ordeal that began nearly 10 months ago and that has included high-level talks between White House and congressional officials, has brought a three-day shutdown of the federal government and has seen Bush abandon the central pledge of his 1988 campaign: "No new taxes."
The package, which the House could consider as early as today, would squeeze more revenue from the wealthiest Americans by raising their marginal income tax rate and limiting the benefit of the deductions they claim.
The package calls for raising the marginal income tax rate paid by the wealthiest Americans from 28 percent to 31 percent.
But the proposed agreement includes neither the surtax on millionaires that House Democrats so fervently sought nor the higher limit on their deductions that the administration and GOP lawmakers preferred. It would also continue, in a modified form, an anomaly called "the bubble" that effectively raises the marginal income tax rate for upper-middle-income taxpayers by reducing the benefit of their personal exemptions.
The package also would grant preferential tax treatment to capital gains. It would cap the capital gains tax rate at 28 percent, even though it creates a new 31 percent federal income tax rate.
Capital gains are currently treated the same as wages and so would be taxed at 31 percent for the highest income taxpayers without this cap.
Last night, a number of major issues, including the scope of reductions in the projected increase in Medicare spending, remained unresolved. Lawmakers also expressed concern that certain upper-middle-income taxpayers might be hit too hard by a combination of three different tax provisions.
Nonetheless, House Democrats predicted the package would win approval. Because House Republicans oppose any deficit-reduction plan that would raise taxes, the new compromise agreement will need overwhelming Democratic support to clear the House.
In many cases, the Democrats' enthusiasm had more to do with the calendar than with the bill's details. Never since World War II has Congress remained in session so close to Election Day, now less than two weeks away.
"Nobody's really comfortable with this package, but we've got to get this done and get out of here," said Rep. Dan Glickman (D-Kan.).
"The bill didn't change that much from yesterday" when House Democrats voiced strong opposition to provisions of a similar plan, said Rep. Dale E. Kildee (D-Mich.). "But the attitude sure has."
The package, devised by House Democratic leaders, came together yesterday morning after a series of breakthroughs, according to congressional officials. Crucial were two telephone conversations between Bush and House Speaker Thomas S. Foley (D-Wash.), the officials said.
The first breakthrough was a recognition by House Democrats that Bush would reject any measure that included the millionaires' surtax. "This is not something that the administration will support," Foley said.
The second came when Democratic leaders were also able to convince administration officials that the House would not pass large limits on the benefits of federal tax deductions claimed by high-income taxpayers.
To make up for the lost tax revenue and to increase the burden on the wealthy, Senate Majority Leader George J. Mitchell (D-Maine) and Senate Minority Leader Robert J. Dole (R-Kan.) urged Foley and House Majority Leader Richard A. Gephardt (D-Mo.) to accept a plan offered by Sen. Bob Packwood (R-Ore.) that would gradually eliminate the $2,050 personal exemptions for high-income taxpayers.
Under the plan, a married couple, filing jointly, with two children, would lose $656 of deductions for every $10,000 of additional income between $150,000 and $275,000. That would be the same as raising the marginal tax rate in that income range by about 2 percentage points to an effective rate of 33 percent.
This would perpetuate the "bubble" that Democrats have criticized, but it would also shift it so that it only affected people with much higher incomes than those who now fall within the bubble.
Neither the administration nor the congressional Democrats could claim complete satisfaction with the final product. Bush had to accept an increase in income tax rates and the Democrats had to accept lower taxes on the wealthy than they had sought.
But in the end, like two weary boxers who have gone the distance, lawmakers and the administration decided it was time simply to claim victory and go home. "We may have gotten all we can get," said Rep. Robert T. Matsui (D-Calif.).
Rep. Rod Chandler (R-Wash.), who returned calls from his district Tuesday, said his constituents were not angry at any of the provisions in the deficit-reduction proposals, but "angry at our inability to act. That's what's driving the political rage out there -- that we have not passed something."
Many of the themes that shaped the budget debate over the last few months and many of the tax-the-wealthy proposals, are likely be the dominant motifs of future political debate.
Democratic lawmakers can be expected to press next year, for instance, for the surtax on millionaires. "I don't think in the future that's likely to be forgotten," Foley said. "That was the simplest, most understandable, most straightforward, most effective way to deal with the problem of how to ask for sharing of burdens by the highest income people in the country."
Those taxpayers would already have their marginal income tax rates raised under the House Democrats' plan, which would even out the two top marginal rates at 31 percent.
That would be a cut from 33 percent for about 3.5 million upper-middle-income taxpayers and an increase from 28 percent for the approximately 600,000 richest Americans.
While many details remained unresolved last night, it appeared that the package would also increase the income subject to the 1.45 percent Medicare payroll tax from $51,300 to $125,000 and raise the 9-cents-a-gallon federal gasoline tax to 14 cents.
It would also impose a 10 percent tax on the amounts by which the purchase prices of new private airplanes exceed $250,000, boats and yachts exceed $100,000, automobiles exceed $30,000, and jewelry exceed $5,000.
Staff writer Steven Mufson contributed to this report.