House Budget chairman suggests it's time to consider new taxes. Spending cuts alone are not enough, argues Gray

After six months of studiously avoiding a call for tax increases, House Budget Committee chairman William H. Gray III said yesterday that Congress will ``have to face the reality of dealing with some revenues'' to reduce the federal deficit. The Pennsylvania Democrat told a meeting of the American Stock Exchange here that he has concluded that ``spending cuts alone'' will not bring the deficit down fast enough.

Representative Gray's remarks set off fireworks just before a House-Senate conference committee began work on a compromise federal budget. The joint committee is expected to take at least three weeks to finalize a budget.

Gray said he hoped that ``after we come out of conference with a strong deficit-reduction package of spending cuts of over $50 billion'' that the Reagan administration would ``lend its support'' for looking for revenues.

The House budget chief suggested that the increases be ``dedicated revenues that would go only to deficit reduction'' and not to fund federal programs.

Until yesterday, most House Democratic leaders had warily approached the tax-increase issue, which many Democrats believe damaged them during the 1984 elections.

House Speaker Thomas P. O'Neill Jr. (D) of Massachusetts expressed surprise at the tax proposal, as he recalled President Reagan's political campaigns against Democrats. ``We're not going to be the big taxers he likes to portray us,'' the Speaker told reporters.

But Senate majority leader Robert J. Dole responded more favorably to the Gray proposal. ``We'll have to see if the House really wants to reduce spending,'' said the Kansas Republican, who did not rule out the possibility of a tax hike.

Gray conceded that the issue would be touchy even after the budget is complete.

``Of course, with the President playing `Dirty Harry' and saying `Make my day,' it's going to be very, very difficult,'' said Gray, referring to President Reagan's promise in gunslinger lingo to shoot down any tax increase with his veto pen.

The House-Senate budget conference opened amid gloomy forecasts of growing federal deficits and attempts to focus attention on the tough job of budget cutting.

The Congressional Budget Office, in its most recent estimates, said that the deficit would go up $200 billion more than expected over three years. The CBO has found both the House and Senate budget proposals for $56 billion in cuts for next year would actually cut only $38 billion from the deficit.

Congressional leaders have tried to use the pessimistic predictions as a way to push budget reductions back into center stage.

``There're a lot of people in this town who really believe that our big problem is tax reform,'' said Senator Dole to the American Stock Exchange conference. A majority of both parties believe ``our biggest problem and our biggest challenge is deficit reduction,'' he said.

Taking clear aim at President Reagan's preference for tax reform over budget cutting, the majority leader said tax reform is ``good news'' and ``makes a great speech.'' He added, ``But after making that speech, the deficit's still there.''

Dole held out hope that the House-Senate conference on the budget could come up with $50 billion to $60 billion in additional savings over three years. He declined to cite specific areas for the cuts, except to propose that state and county employees be required to pay social security and medicare taxes.

Both the Democratic House and Republican Senate appeared to be digging into their positions on the budget on two major issues.

Speaker Tip O'Neill declared that he would not compromise on the House provisions giving full cost-of-living adjustments (COLAs) for social security. ``I have taken it off the table,'' he declared yesterday.

Dole said that if social security is not negotiable, then ``why go to conference?'' Dole and Senate Budget Committee chairman Pete V. Domenici (R) of New Mexico have steadfastly voiced optimism that the compromise budget might include some reduction for social security.

They got some reinforcement from Sen. Ernest Hollings (D) of South Carolina, a member of the House-Senate budget conference. ``I think we can reconcile the difference on social security,'' he said.

On the defense budget, which is higher in the Senate than in the House, Dole said both houses had ``recognized it was time to call a halt'' to big spending increases. ``We can beat the Pentagon to death,'' he told the business group.

``I think we've gotten down about as far as we can go'' in the 1986 defense budget, he said.

Meanwhile, O'Neill indicated that he was prepared to see big cuts in some domestic programs, especially the Small Business Administration and federal grants to cities and states.