Republican efforts to pass a major tax cut ran into trouble in the House yesterday as a leading moderate offered a substantially smaller alternative that threatens to drain critical support from the GOP plan.

Rep. Michael N. Castle (R-Del.) said he is enlisting support among his moderate colleagues for a $500 billion tax cut package that would leave more of the future surpluses for retiring the national debt and bolstering Medicare and other high-priority government programs.

House Republican leaders have scheduled a vote on their nearly $800 billion tax cut plan for Wednesday, but prospects for passage are in doubt because of growing dissension within the GOP ranks and overwhelming Democratic opposition. The leaders agreed late last week to scale back their tax cut to the size of a comparable Senate proposal -- from $864 billion to $792 billion -- in an effort to placate moderates and skirt budget rules that would have left the measure vulnerable to a challenge in the Senate.

But Castle and nearly two dozen other moderates have argued that the House and Senate GOP versions of proposed tax cuts are far too big and premised on questionable long-term surplus forecasts. Castle said that his proposal -- which he intends to try to offer on the floor -- would borrow from the House and Senate proposals but is "targeted at what I think is an acceptable [total cost] for a majority of members."

This development came as congressional Republicans reached a critical point in a debate over the use of $1 trillion of non-Social Security surplus funds over the coming decade, with tax cutters attempting to claim most of the surplus while appropriators insist that some of it is needed to pass the most difficult spending bills, including the labor-health and veterans-housing bills.

The Congressional Budget Office (CBO) has premised its huge surplus forecasts on the assumption that Congress will sharply cut spending in the coming years to stay within the spending caps imposed by the 1997 balanced-budget deal. If the caps are eventually lifted -- as many politicians and budget analysts assume -- then the bulk of the surplus forecast will vanish, leaving little for tax cuts.

"The problem is the party is deeply split, and with a fragile majority it can't move forward without resolving its internal conflicts," said Robert D. Reischauer, a former director of the Congressional Budget Office (CBO). "They'll have to resolve the issue of their split personality -- the desire to reduce taxes substantially, which is in conflict with the reality of the appropriations process."

Appropriators have asked for a portion of the $14 billion of surplus projected for fiscal 2000 to avoid deep cuts in key domestic programs, but so far the leadership has sided with the tax cutters in opposing the lifting of the spending caps.

But House and Senate appropriations leaders argue it would be impossible to adhere to the existing spending caps and still shape domestic spending bills that would attract majority support in both parties and win the president's signature.

Rep. John Edward Porter (R-Ill.) and Sen. Arlen Specter (R-Pa.), chairmen of the House and Senate appropriations subcommittees with jurisdiction over health and human services, have warned of across-the-board spending cuts of 12 percent, or $11 billion, just to stay within the caps. Democrats say the cuts would be much more severe than that and would affect everything from education and Pell grants for college students to anti-drug programs, job training and energy assistance for the poor.

House and Senate GOP leaders have used a number of budget accounting gimmicks to beef up some of the spending bills, but House Speaker J. Dennis Hastert (R-Ill.) and Senate Majority Leader Trent Lott (R-Miss.), as well as the Clinton administration, are insisting that Congress adhere to the spending ceilings.

Specter said yesterday that he has become "so damn frustrated" with the leadership that he has asked for a meeting with President Clinton to try to enlist support for an effort to lift the spending ceilings. He said that without the added surplus funds, Congress and the administration are headed for another fiscal crisis this fall.

"I don't want to wait until October, like we did last year, when it was an absolute fiasco," Specter said.

As they braced for a difficult week of fiscal action, House leaders said they were reluctant to reduce the tax bill below the $792 billion outlined in the Senate, despite Castle's call for a smaller bill.

"At least [Castle] understands the Clinton position of minimal tax relief is not acceptable," said John Feehery, a spokesman for Hastert. "But we believe our numbers correspond with the budget resolution that Mr. Castle voted for. He's making a step forward, but he needs to understand the implications of the budget resolution that he voted for."

House Ways and Means Committee Chairman Bill Archer (R-Tex.) and House GOP leaders spent much of yesterday trying to figure out how to pare back their tax plan and win over the large number of GOP dissidents. Archer was examining several options to scale back the tax bill by at least $72 billion, including a slower phase-in of the tax cut or eliminating some provisions, such as eventual repeal of the estate tax.

But tampering with the plan is difficult because in trying to please one group, the leadership could end up alienating another. The repeal of the estate tax, for example, is seen by many moderates as primarily favoring the rich, but by other Republicans as a bedrock concern of small-business operators, farmers and other key constituent groups.

Archer's plan has also come under fire from environmental groups, who criticize the aid it extends to "distressed communities and industries."

These include an allowance for taxpayers to apply oil and gas losses to taxes paid over the past five years and a new fossil fuel production subsidy that could cost $139 million over the next five years. They also include a tax break for foreign companies' oil-related income, estimated to cost $152 million over the next 10 years; a repeal of special rules applying to a foreign tax credit on income from oil and gas profits earned in another country, estimated to cost $4.6 billion from 2004 to 2009; and extending a tax benefit for smaller oil and gas wells estimated to cost $167 million over the next five years.

"Tax policy should not promote pollution over good economic stewardship," said Friends of the Earth legislative director Courtney Cuff. "It makes no sense to subsidize pollution that the federal government spends billions of dollars to clean up."

Meanwhile, at a White House meeting Clinton urged Senate Finance Committee Democrats to stick with him in opposing a large tax cut.

CAPTION: Rep. Michael N. Castle (R-Del.) proposes a $500 billion plan aimed at reducing debt and helping Medicare.