WASHINGTON -- Having confronted an immovable wall of Democratic opposition, the Bush administration abandoned its lengthy quest for a cut in the capital gains tax rate last night, opening the way for a sweeping, long-deferred budget deal, sources said.
The White House decision removed what had been depicted as the single greatest obstacle standing in the way of a budget plan, thus making it likely that slashing, automatic budget cuts scheduled for Monday would not take effect. Negotiations were to resume today and continue into the night until a final agreement had been struck.
Last night's developments capped a tense day of closed-door talks as the negotiators, their backs against the wall, attempted to hammer together a deal that would trim $50 billion off the deficit for the coming fiscal year, which begins Monday, and an additional $450 billion during the following four years.
By all accounts, however, they remained hung up over the perpetually nettlesome issues of whether to tamper with Social vTC Security benefits and whether to provide some sort of special tax break for income from the sale of investments, better known as capital gains.
"There are some remaining issues that are very difficult that we're working to resolve," House Speaker Thomas S. Foley, D-Wash., told reporters earlier in the day. "Everyone is working in the spirit of good faith and, I think, seriousness."
At the start of yesterday's round of negotiations, Republicans had already agreed to abandon President Bush's long-cherished goal for a cut in the capital gains tax rate, proposing instead to exempt from taxation increases in the value of the asset due to inflation.
But Democrats had remained steadfast in their insistence on an increase in the income tax rate levied on those with the highest income, asserting that the benefits of any kind of capital gains tax relaxation would fall mostly to the well-off.
And so, both sides moved to close the gap. Democrats offered to support a modified capital gains proposal -- excluding 30 percent of the value of an asset from taxation -- and matching it with an increase in the income tax rate paid by the highest wage-earners from the current 28 percent to 32 percent.
Republicans, on the other hand, volunteered a 32 percent capital gains exclusion. Moreover, they offered to abandon their earlier opposition to a change in income tax rates, suggesting an increase for the same income bracket to 31 percent.
The two sides were unable to bridge that seemingly tiny gap between their respective positions.
The Republican proposal would not have increased revenues into federal coffers, while the Democratic proposal would have. The White House insisted that any proposal to increase taxes be revenue neutral -- that is, be balanced by an equivalent reduction in another kind of tax.
Unable to win Democrats over to their side, and unwilling to abandon the doctrine of revenue neutrality, White House officials decided to drop their demands for a cut in the capital gains tax rate altogether.
The negotiators did, however, tentatively agree to a GOP plan to limiting deductions for those making over $100,000 a year.
While yesterday's actions appeared to clear the way for an agreement, they left unanswered the question of whether the full Congress would support the final deal.
"There's going to be a great deal of difficulty, obviously, on any package that provides for the reduction of $500 billion over five years and $50 billion in the first year," said Mr. Foley.
Indeed, the eventual package is expected to be packed with provisions guaranteed to raise the ire of many lawmakers.
The two sides have tentatively agreed to shave $170 billion off the amount needed to keep the defense budget even with inflation. The Pentagon would endure a $10 billion cut next year.
The growth of benefit programs would be slowed by $120 billion. Roughly half that figure would come from Medicare, which provides health care to 33 million elderly and disabled people. Half of the Medicare savings would come from a $5.70 increase in the $28.60 monthly premium that participants pay for doctors' coverage; doctors and hospitals would have to absorb the other half of the Medicare reductions.
Over the course of five years, support payments to farmers would fall by $12 billion, and benefits for civil servants would be cut by $14 billion.
It also appeared probable that Social Security recipients would be docked for $20 billion in savings, either by a three-month delay in their cost-of-living increases or by an increase in taxes levied on benefits.
Tax increases, in fact, will be present in spades in this agreement. Negotiators have tentatively agreed to increase the 9-cent-per-gallon federal gas tax by 8 cents, to slap an additional tax on all fuels and to impose a 10 percent tax on luxury items such as yachts, expensive electronic equipment and jewelry.
"I think all of us know none of us is going to be happy with the budget resolution," said Representative Steny Hoyer, D-Md.-5th.
But if the administration and Congress fail to agree on a deficit-reduction package by Monday, $85 billion worth of arbitrary spending cuts will be triggered, disrupting hundreds of programs. Social Security benefits and military pay will be protected -- but more than a million federal workers have been told to expect furloughs.
Just in case the two sides cannot agree, or in case they agree on a budget the full Congress will not support, House Democrats have devised a fallback plan. Over the opposition of Republicans, the Appropriations Committee has cleared the way for House action on an alternative Democratic budget, something Mr. Bush has promised he would oppose.