Democrats Troubled By Bush's Tax Ideas

IT'S that time of year again, when headline writers can dust off their old friend, "Congress, White House in Budget Battle."

How tough will the battle be this time around? With the nation's economy in deep recession, will the Democratically controlled Congress and the Republican president rise above partisanship and reach quick compromise on a package to promote economic growth?

Or will they hang tough, sticking to their well-rehearsed positions and accomplishing little, except creating issues for the November elections?

House Speaker Tom Foley (D) of Washington, at a Monitor breakfast on Wednesday, said President Bush's State of the Union address Tuesday evening was "the most politically aggressive and, in a partisan sense, combative speech that the president's given. And I'm not sure that that meshes with his call for cooperation."

But in the early going after Bush's much-anticipated speech, the outlines of a possible compromise were already evident: Bush's long-desired reduction of capital-gains taxes in exchange for a higher tax rate for the well-off.

Battle lines are quickly being drawn. House minority leader Robert Michel (R) of Illinois said Wednesday he was not ready to cut such a deal. The minute a move was made toward raising marginal tax rates, the door would be open to further increases, he said. Hints of a bidding war

Plenty of Democrats have also been lining up to take shots at Bush's speech, which they say merely contained "left-overs" from previous budget proposals that Congress had already rejected. It's also full of gimmicks, Democrats say, such as a drop in income-tax withholding. This will put more money in pockets this year but could reduce spending next year as refund checks are lower or eliminated.

Speaker Foley already seems fond of saying that two-thirds of the capital-gains tax cuts would go to the richest 1 percent of taxpayers. "It's a statistical truth, but it's also a gimmick," he says.

Democrats complain that they were ready to move weeks or months ago on a plan to revive the economy, but were held at bay by Bush - for two months or 10 weeks or 18 months (each Democrat seems to have his favorite time frame) - who kept telling his critics to wait for his State of the Union address. Then Bush came back and "challenged" Congress to pass his program by March 20, only 50 days away.

Senate majority leader George Mitchell (D) of Maine called the March 20 deadline meaningless. "We don't operate that way," he told reporters.

"March 20 is baloney," says a House Democratic veteran of budget battles. "The issue will be, on that date, where are the lines drawn."

Ultimately, though, Congress and the White House have to accomplish something, says the House Democrat, "because if they don't and there's a standoff, the country will be disgusted with both of them."

The fact that the Democrats have not emphatically and categorically ruled out any cuts in the capital-gains tax - the tax on sale of assets - means they are willing to deal, says the House Democrat.

Republicans favor the tax cut as a means of freeing money for investment that would spur economic growth and create jobs. In the Democratic Party's reply to the State of the Union speech, Foley objected to "the kind of capital-gains tax cut that will lead largely to accelerated profit-taking, not accelerated investment."

"We need targeted incentives to reward companies that build and buy now, that hire instead of laying off," he said. 'This deep...' and maybe deeper

In a kind of good-cop, bad-cop routine, other key Democrats have thrown verbal bouquets at Bush. Rep. Dan Rostenkowski and Sen. Lloyd Bentsen, chairmen of the two tax-writing committees, complimented the president on a speech well-delivered and promised their cooperation in drafting measures to boost the economy.

Another part of the budget likely to be a subject of partisan wrangling is defense. Bush announced a cut of $50 billion in defense spending over the next five years, but stated flatly: "This deep, and no deeper."

Some Democrats are referring to the $50 billion reduction as only a departure point. "I think you start with $50 billion; you start with the president's assumptions, which I think are going to be on the conservative side of the down-sizing of forces, and you go on from there," says Foley.

Rep. Leon Panetta (D) of California, chairman of the House Budget Committee, expresses disappointment at Bush's "failure to seize an opportunity" with the end of the cold war and virtual demise of the Soviet threat to really cash in on a peace dividend. Some members of Congress have proposed defense-budget cuts of up to 50 percent.

A key factor in the viability of Bush's budget proposal is the cost, which the administration estimates would be an increase of $24.6 billion spread over five years. Under the "pay as you go" rule of the October 1990 budget agreement, any increased spending must be offset by savings within the same category of the budget. The administration has yet to explain where it will make savings to earn back the $24.6 billion.

But with the world dramatically different from what it was in October 1990 - particularly in defense needs - the firewalls of the budget pact that forbid savings from defense cuts to be applied toward domestic spending may be broken down before the next budget becomes reality.