Senate Democrats propose tax cut, defense-fund shift to spur economy

WASHINGTON — WASHINGTON -- Senate Democrats unveiled a wide economic plan yesterday that would combine a middle-class tax cut with a longer-term "Marshall Plan for America" that would redirect defense spending to domestic needs such as bridges, roads and schools.

The plan also calls, in the short term, for additional unemployment insurance benefits as well as grants and loans to state and local governments designed to create jobs in education, transportation and public safety.


"Our first priority in the new year should be to get the economy moving again," said Sen. Paul S. Sarbanes, D-Md., who introduced the package at a news conference with Budget Committee Chairman Jim Sasser, D-Tenn.

The plan goes far beyond the calls of others in Congress -- and the White House -- for a middle-class tax cut to spur the economy.


Still, it was short on specifics. The two senators offered no figures on the size of the tax cut, how many weeks unemployment benefits would be extended or how much money would be sent to local governments.

Details are expected to emerge during committee hearings on the proposal in the coming weeks, the senators said.

The short-term proposals would cost at least $55 billion, Mr. Sasser said, and would be paid for by adding to the deficit through the declaration of an economic emergency by the president. The long-term proposals would be financed through defense cuts, said Mr. Sasser, who expects enough savings from defense to also help reduce the budget deficit, projected to be $362 billion for the coming year.

A "reasonable" defense cut would range between $120 billion and $150 billion over the next five years and up to $400 billion over 10 years, he said.

But the plan drew the criticism of both Republicans and Democrats. Sen. Pete V. Domenici, R-N.M., senior Republican on the Budget Committee, said it would have a "negative effect" on the economy, and House Speaker Thomas S. Foley, D-Wash., said he had reservations about abandoning the "pay as you go" 1990 budget agreement.

While the president has indicated a willingness to renegotiate the 1990 deal -- which would be necessary to enact such an economic plan -- Mr. Bush is reluctant to bypass the spending caps outlined in the agreement.

"I want to see us live within these spending caps," the president said in a televised interview last night.

"I do not want to see federal spending go out of control again," he said.


The president, who is expected to unveil his own economic proposals during his State of the Union address Jan. 28, said in the interview with David Frost that more defense cuts were possible and that some of the money might be shifted to domestic programs. The Bush administration is reportedly considering defense reductions of $50 billion over the next five years.

The economic plan unveiled yesterday was a clear effort by the Democrats to pre-empt the president's address. While Mr. Sasser praised Mr. Bush's calls for reduced defense spending, Mr. Sarbanes criticized the president and his advisers for playing down the continued recession and failing to produce an economic plan.

Both senators said government spending cuts, layoffs and tax increases at the federal, state and local levels for 1991 and 1992 have reached $55 billion and created a "fiscal drag" that is preventing the economy from rebounding. The three short-term proposals would attempt to counteract that drag, said Mr. Sasser.

"Together they should provide a jolt of stimulus that really produces recovery," said Mr. Sasser, who noted that the recession is the longest since the Great Depression. "If we don't do something about it, I think we're going to have continued suffering."

Some economists, including Federal Reserve Chairman Alan Greenspan, have criticized proposed middle-class tax cuts as a "quick fix" that would only add to the deficit. But both senators say action needs to be taken in an effort to turn the economy around.

"I don't think we can afford the risk of simply sitting back," said Mr. Sasser.


Mr. Sarbanes, chairman of the Joint Economic Committee, conceded that the large-scale Pentagon cuts envisioned would have a "regional impact" in areas -- such as California and Maryland -- whose economies depend on defense contractors. But he said the cuts would benefit the country in the long term through investment.

Borrowing the name of the plan that helped rebuild Europe after World War II, the "Marshall Plan for America" would channel defense savings into infrastructure, education, research and development, and worker training.