NEWS ANALYSIS : Whom to Tax? It’s Consumers Versus the Rich

WASHINGTON â€”  Now that President Bush says he wants to put an end to the budgetary trench warfare that has paralyzed the federal government for much of the past decade, the previous stalemate over taxes shifts to a new and far bloodier battleground: Whose taxes should be raised?

In any deal that might emerge from the budget summit agreed to Wednesday, Democrats almost certainly will want to impose steeper income taxes on the rich in what they see as an effort to make the tax system fairer.

But the White House is equally adamant that the best way to improve economic growth is to reduce capital gains taxes and confine any increases to consumption taxes, such as those on energy, smoking and drinking.

“The big dividing line between the Democrats and Republicans is still over who should bear the tax burden,� said Kevin Phillips, a conservative political analyst. “The Administration wants to make sure that any tax hike doesn’t hit the rich. This is the big roadblock.�

As a result, even though the White House and Congress are under greater economic pressure this year to avert drastic Gramm-Rudman spending cuts, there still is a good chance that the latest flurry of activity over the budget could end in failure once again.

“What’s different about this year?� asked California Rep. Robert T. Matsui (D-Sacramento). “Nothing’s different about this year.�

Ever since the federal deficit swelled to record levels in the early 1980s, most independent analysts have agreed that the only way for the Democrats who control Congress to reach agreement with the Republicans who have reigned in the White House would be to adopt a budget package including both higher taxes and reduced spending.

For years, each side has found it easier to go along with only modest reductions in the deficit--mostly achieved by reining in Pentagon spending--rather than to impose any significant new tax burden or reduction in government benefits that would harm its key political supporters.

This year, however, recent economic developments have altered the political landscape, at least temporarily. Higher interest rates are driving up the cost of federal borrowing, while weaker economic growth has slowed the flow of tax revenues into the government’s coffers.

As a result, new estimates of the spending reductions that would be required to meet next year’s $64-billion Gramm-Rudman deficit target have soared--ranging from a minimum of $50 billion to as much as $100 billion if borrowings for the S&L; bailout are counted.

Under current law, failing to reach the Gramm-Rudman target would result in automatic spending cuts divided equally between defense and domestic programs. The fear of drastic across-the-board cuts just before this fall’s election strikes terror in the hearts of both political parties.

That’s why the White House is now prepared to discuss with Congress a budget deal that would raise taxes as well as the Gramm-Rudman ceiling.

“Realistically, we can’t reach the Gramm-Rudman target no matter what we do,� said a GOP budget aide on Capitol Hill. “So the bottom line is we have to set the law aside and then reach a deal that doesn’t put the economy into a recession. That probably means cutting the deficit by roughly $40 billion or so.�

Even a more limited goal of $40 billion would not be easy to reach. Reducing defense spending could save perhaps $12 billion in fiscal 1991, which begins Oct. 1, while other spending cuts might contribute another $10 billion. That still leaves the deal-makers almost $20 billion short.

Higher taxes would be needed to fill the gap. But the two parties remain miles apart on how to do so. “Nobody’s talking about raising income tax rates,� Sen. Alan K. Simpson (R-Wyo.) told reporters after emerging from a meeting Tuesday with President Bush. “It can’t be just gasoline taxes,� replied Rep. Leon E. Panetta (D-Carmel Valley), chairman of the House Budget Committee.

For the White House, any budget compromise must include a cut in the tax rate on long-term capital gains. But Democrats will attack that as a giveaway to the wealthy and are likely to demand that it be coupled with a boost in the tax rate on the wealthiest taxpayers from 28% to 33%. If Bush will not accept that kind of deal, the summit could fall apart on that issue alone.

Several lawmakers, including House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), have recommended raising gasoline taxes, not only to help reduce the deficit but to discourage energy consumption and pay for improvements in highways and mass transit. Each penny increase in the gas tax would raise $1 billion a year.

But boosting gasoline taxes splits the nation along regional lines. Led by Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.), Rostenkowski’s counterpart in the Senate, oil patch lawmakers in the Southwest and politicians representing Westerners who depend on their cars for basic transportation probably could block any significant gas tax hike. One possible compromise might be a broad-based energy tax or a new tax on using fossil fuels that could be billed as an environmental tool in fighting global warming.

Moreover, both Republicans and Democrats in Congress remain wary of any tax increase in an election year.

Democrats “want more taxes so they can spend more,� said a leading House Republican, Mickey Edwards of Oklahoma. “No one in our (Republican) conference will sign off on that.� Meanwhile, congressional Democrats are worried about falling into a White House trap. “They have just one goal,� charged Rep. Ron Wyden (D-Ore.). “To put the tax noose around our neck.�

Consequently, budget negotiations are likely to inch along for weeks and perhaps through the summer as each side probes for weaknesses and searches for the makings of a deal.

Staff writer William J. Eaton contributed to this story.

WHERE TAXES MIGHT BE RAISED

There are no specific proposals on the table, but dozens of different revenue raising options have been looked at by congressional analysts. These include:

Option: Raise the top income tax rate to 33% Who would be affected: Increase taxes for about 600,000 taxpayers--families with taxable incomes above roughly $200,000 and individuals with incomes above $100,000 Revenues: $3.8 billion in 1991 $7.6 billion in 1992 and $41.9 billion over 5 years Option: Increase the federal gasoline tax, now 9 cents a gallon, by another 12 cents Who would be affected: All motorists Revenues: $12.1 billion in 1991 $11.6 billion in 1992 and $58.5 billion over 5 years Option: Introduce a broad-based energy tax (5% of value) Who would be affected: Energy users Revenues: $14.2 billion in 1991 $15.0 billion in 1992 and $80.2 billion over 5 years. Option: Raise cigarette taxes by 32 cents a pack and liquor taxes by 25 cents per ounce of alcohol Who would be affected: Smokers and drinkers Revenues: $10 billion in 1991 $10.1 billion in 1992 and $50.9 billion over 5 years Option: Tax pollutants from stationary sources that cause acid rain ($150 per ton of sulfur oxides, $250 per ton of nitrogen oxides) Who would be affected: Industry Revenues: $3.2 billion in 1991 $4.7 billion in 1992 and $22 billion over 5 years Option: Impose a carbon-based tax on fossil fuels to help prevent a rise in U.S. contribution to global warming Who would be affected: All fuel users ($28 per ton) Revenues: $22.5 billion in 1991 $33.2 billion in 1992 and $162.9 billion over 5 years Option: Tax capital gains held until death Who would be affected: Investors estates Revenues: Nothing in 1991 $1.9 billion in 1992 and $10.1 billion over 5 years Option: Impose a 0.5% tax on stock and bond transactions Who would be affected: Investors Revenues: $7.8 billion in 1991 $11.6 billion in 1992 and $57.7 billion over 5 years Option: Increase taxation of Social Security Who would be affected: Subject 85% of high-income retirees’ benefits to income taxes, up from 50% now Revenues: $12.0 billion in 1991 $19.8 billion in 1992 and $99.5 billion over 5 years Source: Congressional Budget Office