Size of Tax Cuts Still Uncertain

AFTER passing separate plans last month for eliminating the federal deficit in seven years, House and Senate budget writers sit down today to resolve the differences in the two proposals and cast the final mold for potentially revolutionary changes in the federal government.

The Republican plans would eliminate Cabinet agencies, consolidate federal programs, and privatize government enterprises to trim more than $1 trillion in federal spending by the year 2002.

But how much bigger the trim gets is at the center of a broad intraparty split over tax cuts.

Old bull Republicans in the Senate argue that the hefty tax-cut package passed by the House would frustrate efforts to eliminate the deficit. But young GOP ideologists believe tax cuts are a moral issue, a centerpiece in their belief that government is too burdensome and intrusive in the lives of families.

The compromise that is reached over tax cuts, therefore, will be a fundamental statement of Republican purpose: the larger it is, the more government reform it will signal.

"Balancing the budget is not an ends, but a means to accomplishing other objectives that the dominant wing of the Republican Party holds dear: tax cuts and reducing the size of government," says Thomas Mann, an expert on Congress and budget policy at the Brookings Institution in Washington. "Balancing the budget becomes a stated rationale for those policies."

House and Senate in step

The House and Senate budget resolutions, which set the parameters but not the specifics of spending bills, have much in common.

Both would balance the budget by 2002 by extracting huge savings from slowing the growth rate of Medicare and Medicaid, the health-care programs for the elderly and poor. The plans would also squeeze other entitlement programs such as welfare and veterans benefits, and decrease the projected rate of spending of every area of nonmandatory funding except defense.

The plans call for the elimination of up to three Cabinet agencies and hundreds of federal commissions ranging from highways to the fine arts.

But House and Senate Republicans split over tax cuts. The House approved a package of cuts to households and businesses totaling about $353 billion over seven years; the Senate provided tacit approval for up to $170 billion in tax breaks that could be implemented only after the Congressional Budget Office certified that the same amount could be saved through lower interest payments on government bonds.

Republican leaders in the House and Senate, including budget chairmen Sen. Pete Domenici (R) of New Mexico and Rep. John Kasich (R) of Ohio, agreed late Tuesday that the final budget resolution would include a tax cut.

"First, there was recognition that we are going to zero, and secondly, that there will be tax cuts," said Richard May, majority staff director of the House Budget Committee.

Rep. Lamar Smith, a Texas Republican on the Budget Committee, predicts that, at a minimum, the conference will retain the House provision for a $500-per-child tax credit for eligible families earning up to $200,000 a year, and a reduction in the capital-gains tax on businesses.

"Look at how far we've come," says Mr. Smith. "Two years ago Bill Clinton enacted the largest tax hike in history, in terms of real dollars. Now we're talking about how much, not whether, to cut taxes. The Republicans have changed the whole debate."

Stumping senators

In the middle of the Republican debate over tax cuts lies a healthy dose of presidential politics. That Senator Domenici and Sen. Bob Packwood of Oregon, chairman of the Finance Committee, would agree to a potentially significant tax cut indicates the firm hand of Senate majority leader Bob Dole of Kansas. Both chairmen are ardent deficit hawks and question the wisdom of tax cuts before making progress on balancing the budget.

But Mr. Dole is the front-running Republican candidate for president, and is pushing for a tax cut. One of his rivals, Sen. Phil Gramm (R) of Texas, offered a package of tax cuts similar to that of the House, but it was defeated on the floor. Securing tax cuts in conference could enable Dole to claim points for leadership.

But a hefty tax cut could also provoke President Clinton to veto the Republican budget. Yesterday he was slated to veto a package of $16 billion in cuts from current-year spending. The administration supports a much smaller tax cut than the House plan, targeted to middle-class families struggling to send their children to college. The House plan, claims the White House, favors the wealthy.

In fact, Dr. Mann expects a veto. "If Bill Clinton is not prepared to veto at least the first version of [the GOP budget]," Mann says, he will make a mistake. "He's got to be prepared to let things get dicey."

Once the House-Senate conference has settled on a single budget resolution, and both chambers accept it, Republicans will truly have arrived at the base of the hill.

It is one thing to float a plan that saves $288 billion in Medicare costs, as the House plan would. But producing specific policies to restructure the program and trim costs, especially in the face of powerful lobbies such as the elderly, is quite another.

But, as Mr. Smith suggests, those difficult decisions to come are what the Republican's so-called revolution is all about. "I like to think that what we're doing will produce a government that is restructured, reformed, streamlined, and efficient," he says.