Budget deal favors deficit over economic stimulus

August 04, 1993|By Karen Hosler | Karen Hosler,Washington Bureau Jeff Leeds contributed to this article.

WASHINGTON -- To craft a budget deal that could win support from both philosophical ends of the Democratic Party, congressional leaders favored deficit reduction and social spending over business tax breaks designed to jump-start the economy.

The budget bill that is likely to be enacted later this week was characterized by Democratic leaders yesterday as tight-fistedness with a heart.

They contend that it will produce the biggest deficit reduction in history while providing the most generous anti-poverty package in a more than a decade.

Sen. George J. Mitchell, D-Maine, the Senate majority leader, described the five-year package, which calls for $241 billion in net tax increases and $255 billion in net spending cuts, as "serious, balanced, credible and fair."

But Republicans denounced it as the biggest tax increase in history and warned that the package puts too great a strain on small businesses and postpones for later years deep spending cuts.

In their most significant break with Republican policy of the past 12 years, the Democrats chose to finance their program primarily through higher income taxes on the rich and corporations. Higher taxes are expected to yield $275 billion in additional revenues before new credits and tax breaks are applied.

The Democrats have also deeply cut defense, slashed the growth of Medicare and virtually frozen domestic spending, but that wasn't enough to make the numbers match in the final negotiations.

The conferees and the White House were thus faced with a choice of increasing taxes for the middle class, cutting Mr. Clinton's spending initiatives or accepting a deficit reduction target that was lower than Mr. Clinton's goal of $500 billion.

In the end, the big loser was President Clinton's program of business tax incentives intended to stimulate creation of new jobs and economic growth.

Congressional budget negotiators trimmed or eliminated tax breaks the president hoped would ignite the economy. The action followed the defeat last spring of Mr. Clinton's $16.2 billion public works program to stimulate the economy,

A research and development credit approved by the House at $10 billion was cut by the conferees to $4.9 billion. The maximum tax deduction small businesses can claim for equipment purchases was set at $17,500. That's a 75 percent increase from current law, but less than both the House and the Senate had approved earlier.

The $16 billion investment tax credit Mr. Clinton originally proposed was killed outright by Congress almost on arrival.

Further, the last-minute search for revenue hardened the budget conferees against the appeals of business and labor lobbyists who believed they had been wronged in earlier deliberations.

"I think they made a calculated political decision that they would be better off catering to other groups," said Robert Juliano, a lobbyist who came within a whisker of preserving at least a 65 percent tax deduction for business meals and entertainment. Instead, the deduction will drop to 50 percent from 80 percent, producing an estimated $15 billion in additional revenue.

The White House determined that the business meal deduction was not the key to securing the vote of Richard H. Bryan of Nevada, a Democratic senator from a resort state that depends on business entertainment.

The $7 billion lost by partially restoring to 65 percent the so-called "three-martini-lunch" tax break would be better used to protect new social spending sought by House liberals, the White House reasoned.

The liberals were most anxious to preserve President Clinton's proposed expansion of the earned income tax credit for the working poor and succeeded in getting $21 billion in the compromise version of the bill -- $3 billion more than the Senate had approved in June.

Tax credits of up to $3,554 a year would be available to families earning less than $30,000 a year, and for the first time single, adults without children would be eligible for a small credit of $300 annually.

Budget conferees also rescued from potential elimination by the Senate several other parts of the package that Rep. Kweisi Mfume of Baltimore calls the "biggest anti-poverty, pro-family" program in 12 years."

They included:

* $3.5 billion to establish nine "empowerment zones" in blighted urban and rural areas where business can get tax breaks for investment -- one of the few job creating measures. The zones have not been designated.

* $1 billion for a Clinton program to help troubled families stay together.

* $500 million for child immunization.

* $2.5 billion for increased spending on food stamps.

At the insistence of Democratic conservatives in the House and Senate, middle-class tax increases proposed by Mr. Clinton were reduced or eliminated.

The president's $72 billion broad-based energy tax on the heat content of fuel was replaced by a 4.3-cent-a-gallon tax on gasoline that will raise about $24 billion.

Mr. Clinton's plan to raise taxes on Social Security recipients was also pared back so that it now applies only to single people making more than $34,000 a year and couples making more than $44,000 -- and raises an estimated $7.5 billion less than the $57 billion sought by the president.

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