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Asking American to 'Face Facts,' Clinton Presents Plan to Raise Taxes, Cut Deficit

By Ruth Marcus and Ann Devroy
Washington Post Staff Writers
Thursday, February 18, 1993; Page A01

President Clinton yesterday presented a four-year blueprint for reinvigorating the American economy, pairing one of the largest tax increases in history with significant deficit reductions, new government spending to create jobs and a promise of fairness for the middle class.

Clinton introduced his long-awaited economic plan to Congress and the American people in an hour-long State of the Union Address that also promoted a grab bag of other proposals – from health care to gun control to campaign finance reform – as part of his vision of "a new direction" for the nation.

"This economic plan can't please everybody," Clinton said at the end of his address when he returned to what aides had said would be virtually its only focus. "If the package is picked apart, there'll be something that will anger each of us and won't please anybody. But, if it is taken as a whole it will help all of us."

He urged Congress and the nation to resist "the temptation to focus only on a particular spending cut you don't like or some particular investment that wasn't made – and nobody likes the tax increases – but let's just face facts. For 20 years through administrations of both parties, incomes have stalled and debt has exploded and productivity has not grown as it should. We cannot deny the reality of our condition. We have got to play the hand we were dealt and play it as best we can."

The package features a four-year, $493 billion plan evenly divided between tax increases and spending cuts, including a freeze on the pay of federal workers next year and lower raises than scheduled in the following years.

Two-thirds of the money is to go to deficit reduction – bringing the deficit in 1997 down $140 billion from current projections – and the rest to about $160 billion in new spending that Clinton describes as investment. Clinton also is calling for an immediate $30 billion stimulus program to help create jobs in the short run.

The $246 billion in new taxes includes an increase in income tax rates for the wealthiest taxpayers, hiking the top rate from 31 percent to 36 percent for those with combined taxable incomes of more than $140,000. It also imposes a new energy tax on all Americans and subjects about a quarter of those receiving Social Security payments to higher taxes on their benefits.

Much as former president Ronald Reagan set the tone for his administration when he unveiled a package of tax and spending cuts at this time 12 years ago, Clinton's proposals outlined a new Democratic order that he said directly confronts the economic realities facing the country and fairly spreads the burdens and benefits among the population.

Clinton emphasized that "98.8" percent of America's families "will have no increase in their income tax rates." He stressed that neither Medicare nor Social Security recipients would face cuts in their benefits, and that the overall tax burden for families earning $40,000 a year would rise less than $17 a month.

Clinton's advisers, briefing reporters on the plan earlier in the day, warned bluntly that the deficit will return to its upward trajectory after 1997 unless health care costs are reined in, and Clinton devoted a significant part of his speech to an impassioned plea for reforming the health care system.

"All of our efforts to strengthen the economy will fail – let me say this again: I feel so strongly about this – all of our efforts to strengthen economy will fail unless we also take this year – not next year, not five years from now, but this year – bold steps to reform our health care system," he said in remarks that strayed from the prepared text.

As Clinton spoke, his wife, Hillary Rodham Clinton, detailed to head his health care effort, looked on, flanked by Federal Reserve Board Chairman Alan Greenspan and Apple Computer Inc. Chairman John Scully.

Republicans seized upon the tax increase proposals. House Minority Leader Robert H. Michel (R-Ill.), in an unusually sharp response for him, portrayed Clinton as a traditional tax-and-spend Democrat who was trying to obscure that truth with "the biggest propaganda campaign in recent political history."

Clinton's answer for all ills, Michel said, "is more taxes on everyone. . . . The American people would do well to remember: When you hear a Democrat call for taxes, do not ask for whom the tax rises. It will rise for you."

The Clinton address, and the budget documents put out by his team yesterday, amount to the president's official transition from campaigning to governing. To get there, he was forced to put aside some prominent pledges: to cut taxes on the middle class, to halve the deficit in four years, to provide increased health care for Americans with health cost controls.

At the same time, he reinforced other hallmarks of his campaign: to increase social spending in programs for children, for AIDS treatment and research and for worker training; to stimulate the economy with federal spending and make extreme reduction in the deficit later; to trim the cost of the federal government; to move more of the tax burden onto the wealthy, and to cut defense.

The package embodied a word – sacrifice – that was never spoken during the Clinton campaign. It also reinforced a theme that was prominent in the campaign – that the rich and special interests would have to give back some of what they gained during the 12 years of Republican rule.

The Clinton team had billed last night's address as the first major step in enlisting the public and Congress in getting his package approved and ending stalemate. But the president was not content to focus on his economic message. He covered dozens of domestic proposals and left unspoken only one major policy area – foreign affairs.

Seeing the speech as a guide to how he would govern over the next four years, Clinton aides pulled out all stops to ensure the public reception would be positive after a rocky week of questions centering on how much the Democrats would take in new taxes.

Besides enlisting the support of scores of interest groups in a series of meetings at the White House, the Clinton White House turned to the Democratic National Committee to hire a telemarketing firm to drum up support in the form of calls and letters to Congress, the media and to pollsters. Clinton even invited network television anchors to lunch yesterday with him, Vice President Gore and other top aides.

Before the speech, Clinton made the unusual move of calling one of his major political opponents in the fall, Ross Perot, to brief him on the plan and enlist his support.

Perot's 19 percent share of of the presidential vote makes his a compelling voice in the public debate over how credible the economic program is, particularly in reducing the deficit that was the Texas billionaire's prime campaign concern.

Perot has scheduled a series of television appearances on major news shows, and the administration waited anxiously last night to see if the plan got a thumbs up or thumbs down from him. In the first appearance, on ABC's "Nightline", Perot called Clinton's address "a good speech, a positive speech" but said he would withhold judgment on the proposals until he saw the details to determine if the deficit-cutting measures "were real."

While Clinton will phase in his deficit reduction, starting with just $66 billion in 1994, the new spending will come quickly. Because of what administration economists describe as a "jobless recovery," Clinton asked Congress for increased spending including a $30 billion short-term stimulus package – divided among new spending and tax incentives that advisers estimate will create 500,000 jobs, although not all of them fulltime.

He proposed spending $160 billion during the next four years in "long-term investment" in children and families, rebuilding the nation's infrastructure, high technology, worker training and other programs that were at the heart of Clinton's campaign for the presidency.

"This is the president's mark that we present to the country," Office of Management and Budget Director Leon E. Panetta told reporters.

The administration released only partial documentation of its budget plans, saying the rest would be released today.

Some figures did not add up in the budget documents, no explanation was provided for a number of the proposed cuts, and some estimates such as the number of jobs created, went up sharply in the course of the day.

However, both the winners and losers in the new Clinton era were evident in the budget document. Programs for children, for women, for improved health care – all issues that Hillary Clinton had championed before and during the campaign – were clear winners. The very wealthy, lobbyists and federal employes were the clear losers.

One of the centerpieces of Clinton's campaign – his national service program to allow all Americans to attend college and pay back their loans by taking community service jobs later – was to get off to a slow start, with proposed spending of only $98 million next year and a total of $6 billion over the next four years.

"The attack will be that this is tax and spend," Panetta said, correctly anticipating the outcry from Republicans. "My response would be that we have been taxing and spending for the last 12 years."

Here are the major elements of the proposals, as outlined in documents and briefings by administration officials:

Tax increases. Clinton's new tax would increase the top rate to 36 percent for those who file jointly with taxable income of $140,000 and single taxpayers with incomes of $115,000.

In addition, wealthy taxpayers would pay a 10 percent surcharge on the amount they earn over $250,000, excluding capital gains. The alternative minimum tax would rise to 26 percent for income less than $175,000 and 28 percent for income over $175,000. Overall, increases in individual income tax rates would generate $126 billion in new revenue from 1993 to 1998.

Wealthy taxpayers' full salaries would be subject to the Medicare tax, not just the first $135,000 as under current law. That provision alone would raise $29 billion over five years.

The corporate tax rate would rise to 36 percent for taxable income above $10 million. Business and lobbyists would also be hit by a plan to deny tax deductions for lobbying expenses and club dues, and to reduce the deductible portion of business meals and entertainment from 80 percent to 50 percent.

The energy tax, called a modified Btu tax, would impose taxes on nearly all fuels, according to their energy content as measured in British thermal units. Natural gas, coal and nuclear power would be taxed at one rate and oil at a rate more than double, raising an estimated $71 billion over five years.

On the tax cuts side, Clinton would expand the earned income tax credit to help offset the impact of other tax increases on the working poor – leading to the estimate that those making less than $30,000 annually would probably not see their overall tax burden rise.

He would also provide investment and research tax incentives for businesses tax breaks for creation of enterprise zones.

Spending cuts. Of the $247 billion in spending cuts over four years, Clinton planned defense savings of $76 billion, cuts in domestic discretionary spending of $50 billion, and entitlement cuts totaling $91 billion. Although Pentagon officials refused to provide details, the proposed defense cuts were roughly consistent with Clinton's campaign pledge to shrink the military from 1.8 million to 1.4 million men and women in uniform by 1997.

The discretionary domestic cuts included staple pork barrel items that presidents have previously proposed trimming but have been unsuccessful in shepherding through Congress, something that Panetta freely acknowledged yesterday.

Clinton also targeted for elimination or reduction a wide range of subsidies long enjoyed by those who use federally owned natural resources, setting the stage for a battle with western economic interests and their supporters in Congress.

The largest chunk of the domestic cuts that are not mandated by law were to come out of the hide of the federal government and its employees, who shouldered almost $32 billion of the $50 billion in cuts through the reduction in federal pay, the cutting of 100,000 federal workers through attrition, and other administrative savings and "streamlining."

On the entitlement side, the largest single savings – $21.4 billion -- comes from increasing from 50 percent to 85 percent the amount of Social Security benefits taxable as ordinary income, a move that affects those with annual incomes of $25,000 for single taxpayers or $32,000 per couple.

Congressional sources noted yesterday that some of the cuts included in the Clinton program were due to take place regardless of who was president.

New spending. Clinton calls this "investment" and has concentrated it in two places. One is on the on projects aimed at creating jobs quickly and thus stimulating the economy, much of this traditional pork barrel government spending on roads, bridges, sewer plants and the like that Congress will divvy up among its various members.

The other is for programs with a social content aimed at reversing the Reagan era or giving new emphasis.

Among the fast infusions of cash under the $16 billion spending part of the stimulus program are $4.1 billion for highway construction projects; $2.5 billion for Community Development Block Grants, a favorite of mayors and governors; $1 billion in additional public summer jobs, and nearly a billion in wastewater cleanup initiatives.

Of the 500,000 new jobs that would be created in the short term, Panetta said, 200,000 will be permanent, 150,000 will be temporary and summer jobs and another 125,000 to 150,000 will be created indirectly.

In the category the Clinton team has dubbed "rebuilding America," they would spend an additional $17 billion over four years on science, engineer and technology grants; high performance computing, and extending the research and development tax credit.

They would spend $8 billion more on environmental causes such as natural resource protection and clean water projects, plus more for energy conservation and renewable energy programs.

Programs that help children, such as Head Start, education reforms, youth job and apprenticeship programs and the WIC food program would get additional funding.

© Copyright 1993 The Washington Post Company

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