Republicans at the bipartisan budget talks dropped their long-standing demand Friday night for a lower or inflation-adjusted capital gains tax, pushing instead for other pro-growth incentives, sources said.

The new GOP position came after Democrats and Republicans hit what one source called "a wall" in their unsuccessful attempts to agree on how high income-tax rates on the rich should be in exchange for the capital gains adjustments President Bush and Republicans have wanted.$105.7 billion may be cut

Negotiators were expected to recess their talks late Friday and resume early Saturday in hopes of reaching agreement before up to $105.7 billion in automatic spending cuts required by the Gramm-Rudman balanced budget law are scheduled to kick in on Monday.

That law set the deficit reduction target for fiscal year 1991, which begins Monday, at $64 billion. The administration has projected next year's deficit to be about $169 billion - $105 billion over the target. The automatic cuts are designed to force government spending down to that target level.

Bush has vowed to veto any congressional attempt to delay the Gramm-Rudman cuts, called sequestration, unless a budget agreement is reached first.

Republican alternative

Instead of capital gains, a source said, Republicans are now concentrating the demands on pro-growth incentives such as the establishment of enterprise zones, tax breaks for investments in emerging or small business and the family savings plan Bush first proposed back in January when he submitted his fiscal year 1991 budget plan.

The source said Republicans had offered during a full day of talks on Friday to alter an anomaly in the 1986 Tax Reform Act, called the bubble, in which couples with taxable incomes of $78,400 to $185,730 paid a higher marginal income tax of 33 percent on that income while richer taxpayers saw their rate drop to 28 percent for income earned over $185,730.

31 percent income tax

Republicans offered a new top rate of 31 percent, the source said, if Democrats would accept a new package of pro-growth proposals that did not contain a lower or inflation-adjusted capital gains rate.

The 31 percent rate was acceptable, the source said, because that is the rate at which the effect on federal revenues is neutral - those whose taxes would go up from the current 28 percent would pay enough in extra taxes to offset the loss to the Treasury from those whose rate would drop from 33 percent.

Democrats want 32 percent

Democrats, however, held out for a 32 percent marginal income tax rate, which was not revenue neutral, and the two sides determined that they had reached a stalemate and decided to drop the whole package, the source said.

Both the House and Senate plan to meet in rare Sunday sessions and the specter of bitter partisan confrontations loom.

If no budget agreement is reached by Sunday, Democrats may try to force Bush's hand. They may try to pass a temporary money bill to continue spending for a week or two at this year's level and, in the process, delay the Gramm-Rudman cuts, forcing him to veto it and take the political heat for shutting down the government Monday.

Or, without a bipartisan agreement, they may try to pass their own Democratic budget plan to cut the deficit and force him to sign or veto that.

Working toward Monday deadline

If an agreement is reached, Congress on Sunday could pass a budget plan adopting the tax increases and spending cuts it contains before Monday's deadline. At the least, lawmakers could approve a bill delaying the cuts for a few days until the budget agreement could be implemented legislatively.

Both parties have said the Gramm-Rudman cuts would devastate federal programs and services, such as air traffic control and meat inspection, require unpaid furloughs of thousands of government workers and inconvenience or aggravate millions of Americans.

The five top congressional leaders of both parties and three key White House negotiators have met for all but one day since Sept. 18 trying to hammer out a budget accord. A larger bargaining group, which began meeting May 15, failed to strike a deal and broke up on Sept. 17 after 10 days of secluded talks at Andrews Air Force Base outside Washington.


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Business as usual?

Federal workers are being told to report for work Monday but to be prepared to go home if there's no agreement between Congress and the White House on how to pay them.

In the absence of legislation to keep the government operating beyond the start of the new fiscal year Monday, non-essential workers would be sent home within three hours if a government "phase-down" is launched.

No cuts in Congress

The House on Friday blocked a Senate move to include the pay of members of Congress and top administration officials in any government-wide spending cuts that will be required if a deficit-cutting agreement is not reached before Monday.