Tax Cut Vs. Health Care In Budget Fight Government Facilities Reopen As Real Work On Spending Starts

Negotiations between President Clinton and Congress over a seven-year balanced budget hinge most on one basic trade-off: Republican willingness to scale back a $245 billion tax cut to allow for more spending on health-care programs.

With hundreds of issues to resolve in just a few weeks, reaching a compromise won’t be easy. Failure could mean another government shutdown like the one that ended Monday.

“Hopefully, we’ll be able to get something Congress can pass and the president can sign - but I don’t expect it to be smooth,” said Minnesota Rep. Martin Sabo, the senior Democrat on the House Budget Committee.

The House gave final approval Monday to a massive GOP budget bill that would rein in programs for the elderly and the poor, cut taxes for middle-class families and investors and balance the budget in seven years. But Clinton will veto that legislation.

The House also sent the president a temporary funding bill that will keep federal government agencies running until Dec. 15. Clinton signed that measure Monday night.

Beyond the tension over tax cuts vs. spending on Medicare and Medicaid, there are two big wild cards in the budget talks:

Making Congress’ seven-year economic forecast more optimistic instantly would give negotiators more room. Slightly rosier estimates of economic growth, interest rates and unemployment translate into projections of higher revenues, less spending on benefit programs and lower deficits. Congress is using more pessimistic deficit projections than Clinton, and the difference amounts to more than $400 billion from 1996-2002.

Adjusting the Consumer Price Index (CPI) - the government’s official measure of inflation - automatically would raise tens of billions more in taxes and lower spending on Social Security. Income tax rates and retiree cost-of-living adjustments both are tied to the CPI, a measure that many leading economists say overstates inflation.

The talks are not expected to start until sometime next week.

Before that, the two sides must decide on a mutually acceptable set of economic projections. That forecast is the framework into which all other budget estimates must fit, the common language of any negotiations. The technical work will take place this week.

The agreement between Clinton and GOP leaders called for using Congressional Budget Office numbers but required the CBO to review its estimates with experts in the administration and outside of government. Private economists are also more optimistic than congressional estimators.

Beyond a seven-year time frame for balancing the budget and CBO-certified economic projections, everything else is open to negotiation.

“We go to the table with no preconditions,” said Senate Budget Committee Chairman Pete Domenici, R-N.M. “Everything is on the table.”

Dozens of combinations could lead to a deal - or disaster. Here are some of the key policy matters where negotiators will probe for compromise:

Taxes

Administration officials are putting it bluntly: The GOP tax cut must be whittled back.

“It’s very difficult to see a $245 billion tax cut as part of that package,” White House Chief of Staff Leon Panetta told NBC. “It’s going to have to be much smaller and much more directed to working families.”

A possible compromise would be a tax cut of about $170 billion, the size of the economic dividend that’s projected to flow from lower interest costs and stronger growth under a balanced budget.

For his part, Clinton will probably have to accept some reductions in the Earned Income Tax Credit, a government payment intended to reward the working poor. A Clinton-inspired benefit for childless workers is extremely vulnerable.

Medicaid

The toughest challenge of the talks could well be coming up with a compromise on the federal-state health program for 36 million poor and disabled people, and the elderly in nursing homes.

Republicans are seeking more than $160 billion in savings from the program over seven years, and there’s a widespread sense that it’s too much. “The largest portion of any money that is found is going to go into Medicaid,” said Rep. Dan Miller, R-Fla., a Budget Committee member. “We’re very aware of the needs of that program and the impact on the states.”

But there are huge differences between Clinton and Congress that go beyond money. Republicans want to turn control of Medicaid over to the states, while the administration wants to retain a strong federal role.

Consumer Price Index

Changing the official inflation measure is extremely controversial. Essentially, it would raise taxes and lower future increases in Social Security benefits. But there are many people on both sides who are hoping it will happen.

“CPI is part of the mix if the administration brings it to the table,” said a senior Republican aide. “It’s not an easy one without everybody agreeing to do it together.”

Medicare

Despite the rhetoric, the two sides are really not that far apart on Medicare, the health-care program for 37 million mostly middle-class elderly.

Both would encourage the elderly to join cost-conscious managed-care plans, raise Medicare Part B premiums for doctors’ services, and cut payments to hospitals and doctors.

The Republican plan includes additional premium increases for well-to-do retirees, a step Clinton has supported in the past. Clinton is likely to insist on less deep cuts to hospitals.