Balance the budget in 5 years, give $91 billion in net tax breaks and change Medicare. The Congress and the White House appear to have a deal. Following a background report, John Kasich (R-OH), House Budget Committee Chairman, and Gene Sperling, the White House National Economic Advisor, discuss the merits of the plan. Economists then scrutinize their analysis, after which Kasich and Sperling return to rebut criticisms.

CHARLES KRAUSE: Last night's deal was the culmination of seven months of tough negotiating between the White House and Republicans on Capitol Hill.

SEN. TRENT LOTT, Majority Leader: We have reached a tentative agreement with the administration on the Balanced Budget Act and the tax relief package.

CHARLES KRAUSE: The agreement contains a plan to balance the federal budget by the year 2002. It also promises the first major tax cuts in sixteen years--a total of $91 billion over the next five years. The agreement comes amid a booming economy and increased tax revenues that have driven the deficit down in recent years.

There are some observers who've argued that with the economy growing, a balanced budget isn't necessary and could even be counterproductive. The White House and Congress, however, felt the budget plan was needed. Today, Congressional Democrats traveled to the White House to hear President Clinton praise the deal.

PRESIDENT CLINTON: This agreement meets my goal of balancing the budget in a way that honors our values, invests in our people, and prepares America for the 21st century. It is very, very good for our country. It's a victory for every parent who wants a good education for their children, for every child in a poor household who needs health care, for every immigrant struggling to make it here, for every family working to build a secure future. It is the best investment we can make in America's future.

CHARLES KRAUSE: On Capitol Hill, the GOP leadership also claimed victory.

SEN. TRENT LOTT: Today we celebrate the beginning of a new era of freedom. We have joined the President, and we have come to an agreement that will lead us to less Washington spending, to tax relief for working Americans, to security for our senior citizens, and less dependency on the government, more responsibility, and opportunity for individuals, communities, and states.

This truly is a great moment. We made a decision earlier this year that we're going to work together to get this victory for the American people. And that's what it's really about. It's not about partisan politics. It's not about who's President or who's in the Congress. It's about returning the government to the people.

CHARLES KRAUSE: There were only a few dissenting voices, among them liberal Democrats, who say the plan favors the wealthy.

DEFAZIO: It seems too good to be true and you know what, it is, it is. This is not a new day in Washington, DC. This is business is usual, cutting up a fat hog, make wildly optimistic assumptions about the economy and revenues, cut social programs a little, don't take a penny out of the Pentagon, and give a host of generous tax cuts slanted toward the most wealthy in America and the largest corporations.

CHARLES KRAUSE: And at least one tobacco state Republican tempered his overall support for the play by objecting to a proposed increase in cigarette taxes.

COBLE: The inevitable tobacco tax, that, as you know, this has been discussed on this Hill for several weeks now. And we from the tobacco belt were waiting for the other shoe to drop, and it's dropped.

CHARLES KRAUSE: Both the House and Senate are expected to debate the budget agreement before leaving Washington for the August recess.

JIM LEHRER: Two key players in all of this are with us now. Gene Sperling is President Clinton's national economic adviser, and Republican Congressman John Kasich of Ohio chairs the House Budget Committee. Gentlemen, let's go through the main parts of this one at a time. First: tax credits for children, $500 per child under age 17, $110,000 income limit for couples, low-income families qualify. Mr. Sperling, what is this designed to accomplish?

GENE SPERLING, National Economic Adviser: Well, this is designed to help average working families who I think both Chairman Kasich and I would both agree have not seen their after-tax incomes go up as much as any of us would like over the last ten or fifteen years.

A family making $40,000 with two kids, this is giving them $1,000 more in after-tax, disposable incomes. That means a lot to a family. And it also says that after we balance this budget and get the deficit reduction down, we're giving a bit of dividend, and giving a bit of that dividend back to the American people in terms of the tax relief, but most importantly in continuing the lower interest rates and the strong investment level expansion that we've had in this economy since 1993, when the President decided to take some leadership and bring this deficit down, and in the last year when we've been able to work together with Republicans to do it in a bipartisan fashion.

JIM LEHRER: Congressman Kasich, on the low income families being able to qualify, now that was a compromise. You didn't want that in there at the beginning, did you?

REP. JOHN KASICH, Budget Committee Chairman: Well, it was actually in our Contract with America, and the problem was we had limited amounts of tax cuts to give. Fortunately, the package actually increased the amount of tax relief that Americans would give. I, myself, am personally very happy that this has worked out this way because I think we're always interested in helping working Americans. And those people who are at the lower income levels, you know, they can go one of two ways, really. They can fall off the curve and find themselves on welfare, which we do not want, or they can have a dream of being able to get ahead.

And so I think that all working families being able to benefit under $110,000 in income, with this child credit, is wonderful. It was part of the Contract with America. I put it in the first budget in 1993, and it's designed to help families. It's designed to send some power into people's pockets and is a shift away from Washington and a shift of some influence and money back home. It's a good provision.

JIM LEHRER: Now, the capital gains tax cut. The current rate is 28 percent. The deal under the new rate is 20 percent for assets held one to five years, 18 percent for assets held more than five; 8 to 10 percent for incomes below $41,200. Now, Congressman Kasich, this has been something you Republicans have wanted for a long time. Why was it so important, and is this exactly what you wanted?

REP. JOHN KASICH: Well, we wrote it in 1993, again, Jim, and we were also--had it in the Contract with America, and we're glad this is being enacted for a couple of reasons. One is for the--a lot of Americans now are involved in investment income. In fact, they estimate up to 50 percent of all households. And it's risk-taking. It's designed to say that if you take a risk, you ought to get a reward. If we make the rewards of risk taking too high, it's common sense. People won't take risks.

We believe this will result in more investment and better job creation. And, frankly, if you have a pension that is at all dependent on mutual funds, for example, it's going to increase the value of your pension. So there's no panacea--any single magic bullet--but we think that it's something that's good for virtually all Americans.

JIM LEHRER: Now, Mr. Sperling, the President and other Democrats have opposed this for as long as the Republicans have been pushing it. And yet you agreed to it. Why?

GENE SPERLING: Well, we are clearly pushing our priorities in the tax cut bill. Our priorities were a $1500 tuition tax credit for higher education, a 20 percent tuition tax credit, a $500 per child tax credit. Those were the core tax credits that help middle class and working families. Those were our priorities, but this is a bipartisan budget agreement. And they made very clear from the start that this was a priority they had to have; that they were going to go along with the increases in education spending and the coverage of children's health care that we wanted very much.

I do think if we were going to do it, which, again, it wasn't our priority, but if we were, I think putting a focus on more patient capital, more longer-term investment, is probably a sensible way to do it. And, in fact, I think this is going to consider having the holding period for 18 months, which in many ways could promote longer-term investment and give less of an incentive for more churning and speculation.

JIM LEHRER: So in order to get what you want to get, you had to give them this. That's the bottom line, right?

GENE SPERLING: You know, if you're doing a bipartisan budget agreement, you have to give the other side some wins, if you want to get the things that are important to you.

JIM LEHRER: All right. Another one was the estate tax. Sec. Rubin said on this program right after all of this began that this was also something the administration did not support, and, yet, here it is. Why?

GENE SPERLING: Well, I think that we supported--

JIM LEHRER: Let me point out what this says.

GENE SPERLING: Yes.

JIM LEHRER: Let me make sure that people understand. The current exemption of estate taxes is $600,000. That would increase to $1.3 million for farms and businesses right now, and it would increase to $1 million--the exemption would--for all estates over the next 10 years. Okay. Go ahead. Why did you go for this?

GENE SPERLING: Well, we always favored some form of estate tax cut relief. Nobody believes that somebody who owns a family-owned business, a small business, a family farm, should be forced to sell it to pay taxes. Everybody agrees that's wrong.

We had a more limited way of doing it initially, but we understood that that principle--what we were most concerned about however, was not having an overall tax cut that was going to have exploding costs in the second ten years. That's the 10 years when all of us should agree that we should be focusing on long-term entitlement reform. We don't want to be draining money away from the Treasury when we need that to shore up long-term Medicare and Social Security. What Sec. Rubin and others of us who were negotiating focused on was making sure the overall package was stable and kept the deficit in good shape by dropping the capital gains indexing and by having some more reasonable restraints on the IRS. We felt the overall package was good. The estate tax relief was probably a bit more than we would have preferred.

JIM LEHRER: Then you, Republicans, Congressman Kasich--some--

REP. JOHN KASICH: Can I say one thing about that?

JIM LEHRER: Sure.

REP. JOHN KASICH: Because that's really a blow to liberalism because when you die today and you've spent a lifetime building something, you don't just visit the undertaker, but you visit the IRS at the same time. And I think this is an idea that when you work a lifetime, you ought to be able to pass some of what you've built onto your children. So it's almost a cultural thing in a way, Jim. But all of these tax cuts really represent a shift from the power of government.

And we have reduced the size of government and let people keep more of what they earn. And that's what this is all about--the best example of us entering an era now where we can begin to recognize the limits of government and the importance of people.

JIM LEHRER: But some of you Republicans wanted the estate tax eliminated altogether. This is also--this also represents a compromise on both of your parts, correct?

REP. JOHN KASICH: I think so, look. But, Jim, this is what we were searching for, and we're very pleased about it. Our people feel good, and it's not just the estate and it's not just the capital gains. We're very happy with the program the President brought to us to provide for help for education, for moms and dads, single moms can educate their kids easier if, you know, mom doesn't have to go out and work as hard to send their kid to college to help her husband educate the kids. We love that. We love the child tax credit. It's a balanced package. The most important thing is it's paid for and it's part of an overall balanced budget.

JIM LEHRER: Now, the cigarette tax was one of the taxes you raised. That was easy, right, Congressman?

REP. JOHN KASICH: Well, I personally am not happy with it not because I'm for the cigarettes. I just don't want any more revenue coming into the government, but this cigarette tax passed in the United States Senate, and it is part of this package and, you know, that's just part of it.

JIM LEHRER: Yes.

REP. JOHN KASICH: But our next cuts are $91 billion, which is, obviously, $6 billion above the $85 where we started.

JIM LEHRER: It's now 24 cents a pack. That'll go to 10 cents--or it will increase 10 cents in the year 2000 and 5 cents more in the year 2002. Now, the President wanted that, Mr. Sperling, right?

GENE SPERLING: You bet he did. We wanted it to be 20 cents. And I'll tell you why. It's not just because it raises revenue that can be used to provide up to 5 million children or help to provide up to 5 million children more health care. It's because 3,000 children a day start smoking, and 1,000 of them will die prematurely because of tobacco. And the best deterrent effect that a tobacco tax has is on preventing young children, young teenagers, from starting to smoke.

So we think that it was the revenues it took in for children's health care were positive, but the deterrent effect it has on young teenagers from starting to smoke is a positive thing, and the President absolutely supported it.

JIM LEHRER: Now, Mr. Sperling, the children's health insurance part of this, which is $24 billion, will be through block grants to the states. Now that will be financed partly by this cigarette tax, is that right?

GENE SPERLING: Well

JIM LEHRER: Yes and no?

GENE SPERLING: As you know, money is fungible. You can say it's financed. You could say it any way you want. The fact was the President wanted $24 billion. He wanted enough so we could try to cover 5 million children who don't have insurance today. 80 to 90 percent of them are in working families. And we wanted to make sure there was a meaningful benefit package.

We're not trying to put unnecessary strings on states, but we want to say that when states get this money to provide coverage for children, it needs to be a meaningful package. It should cover vision and hearing, and the things all of us would want for any child of ours to have when it comes to health care.

JIM LEHRER: Now, Congressman, does that create a new system, a new plan, a new program, a new type of program?

REP. JOHN KASICH: Well, Jim, you know, it's important to note that the Republican governors across this country have had a great passion to be able to cover more people who do not have health insurance and those are generally the people who are the working poor. They have asked the administration to give them more flexibility on Medicaid so they would have more dollars to cover more people. Frankly, I don't think we ought to have these waivers. I think we ought to let the governors cover people in the best way that they know how.

JIM LEHRER: Wait a minute. Let me explain that.

REP. JOHN KASICH: This is additional help.

JIM LEHRER: Excuse me. Hold on just one second. We just want to explain when you say waivers. Now the way the system works, that the state wants to come in and apply for a waiver from the federal government to do it differently.

REP. JOHN KASICH: Right.

JIM LEHRER: I just wanted to explain that. Go ahead.

REP. JOHN KASICH: I'm sorry about that. That's Washington talk.

JIM LEHRER: That's okay. That's all right.

REP. JOHN KASICH: But, look, this is additional help to the governors--

JIM LEHRER: Okay.

REP. JOHN KASICH: --to be able to give them additional resources to cover the people that they've been passionately interested in covering, and I think it is a flexible enough program, is not an entitlement. It is--

JIM LEHRER: But you're happy with $24 billion. That's doesn't--that's okay?

REP. JOHN KASICH: Well, I think we should have been at about 16, so there is a--there is a give on this. The Senate Republicans passed 24, and that's where we ended up. Unfortunately, the extra $8 billion will be phased in over a period of time, and then we'll take a look at how this whole program is working at some point in the future. But we're really moving into uncharted territory when it comes to how many people will actually be helped. That is the impact of this program.

JIM LEHRER: Now, on education, Mr. Sperling, this was one of the President's main things--up to $1500 per year college tuition credit for two years; a 20 percent tax credit for the first $5,000 in school expenses for years three to four. Why was this so important and what will this actually accomplish, Mr. Sperling?

GENE SPERLING: The President wanted to send both a signal and a financial incentive to everybody in this country that you need two years of higher education, just like people need 11th and 12th grade before. And so this says that for everybody who wants to go to at least a community college or to a regular four-year college, that you can have up to $1500, a $1500 education tax credit for your first two years of school, and if you go on to your third and fourth year, to grad school, for lifetime learning, education any time in your life, you can deduct 20 percent.

What that does is it reforms our tax code to say that we believe that investing in education is the right thing for working families. It's the right thing for our economy. It's the right way for people to get ahead. And we're going to try to give people an incentive to do it, and if a family is doing the right thing and sending their kid to college, we want to make it easier for them to do the right thing for their child and for this economy.

JIM LEHRER: Congressman, is that going to work?

REP. JOHN KASICH: Well, Jim, we're pleased that as Republicans that we're going to continue to emphasize education. We, of course, don't want to just focus on higher education, but we like to have education choice, so that moms and dads can force competition at elementary and secondary level, and I think we all recognize we have a severe problem in our country with not all children being able to benefit from public education. But education is a key.

Our only objection to the President's package was the way in which he put it together, and, frankly, there was concern on both sides of the aisle up here about the nature of that package, and I think we've come a long way in shaping it in the right way, and education is a key in a changing world, where technology is so important, technology is real power, and it really translates into better wages for all Americans. We need this.

JIM LEHRER: All right. Now, finally, Medicare. It cuts payments to health providers by $115 billion over five years; Medical Savings Accounts, demonstration project. But what it does not do, there's no change in the age of eligibility, not means-testing for wealthier seniors, no co-pay for health--for home health visits, very small changes, Congressman, right?

REP. JOHN KASICH: Well, let's not--Jim, in 1995, we essentially proposed this package, and we were hammered all over the country about this, and it has essentially been adopted, and the level of savings and entitlements, Jim, is going to be about $340 billion over the next 10 years. It's just a staggering number and will preserve Medicare for 10 years.

And we give seniors more choice. We permit hospitals and doctors to be able to offer services to our senior citizens, and we've made an adjustment between the rural and the urban areas, so there will be more opportunity, more competition, more choice for our seniors. So let us not sell short the significant changes in the program, but we also have a commission that says that we will do a lot more heavy lifting, because, as you know, as the baby boomers start to retire, we're going to have a crisis between the generations.

And I'm very hopeful we'll have a good commission, a good report, and we'll have even additional changes to this program. I would liked to have seen them happen now. I supported them, and I argued for them. But I think we should be very pleased and very happy with the level of changes and the amount of savings, and the extension of the life of Medicare in this package. Let's not take it for granted. Let's not take it for granted. Let's have a little celebration about this.

JIM LEHRER: Mr. Sperling, how would you characterize the gravity of the changes in Medicare that this program has?

GENE SPERLING: Well, here is one point that John Kasich and I agree on. People need to look at this package. I actually think John--it's about $400 billion in savings over 10 years.

REP. JOHN KASICH: I'm sorry. There's a nickel and a dime there, Gene. You're right.

JIM LEHRER: Missed it by a bill or so. Go ahead.

GENE SPERLING: I don't agree that it is like the plan in ‘95, but I think what it is, and I think it was an honorable compromise between the balanced budget plan the President had in ‘96 and where the Republicans were, and this is a significant amount of savings. It restores the Medicare Trust Fund. So you're talking about $400 billion over 10 years, but more importantly, we're restructuring the payment systems in the places where you're having exploding costs, like home health care, skilled nurse facilities. There's things in here that prevent home health care fraud.

There's more choice. I think this is one of the true places where the President worked with Democrats and Republicans to break gridlock and do something significant. So I agree people need to look at how significant this Medicare savings package is. It's a big first step. Again, I agree, we need a long-term process to do more, but I also think a long-term process to address the long-term Medicare problems for the baby boomers' retirement, as well as for Social Security, but I think there's things we could do without waiting for a commission, and one of them is a high income premium increase.

The President supported that. It took political courage. I think a lot of Republicans and Democrats want to go along. That's something that we could get done; it would add some additional savings; and would be a good structure--restructuring for the future.

REP. JOHN KASICH: Jim, it's fair to say that Gene Sperling and I are both committed as baby boomers--to not only fixing Medicare on a long-term basis but also beginning to solve the problems related to Medicaid and Social Security--what we needed to take this first step to gain a little confidence with the public, we could actually manage entitlements without harm coming to them. So I think that this is the reason to be very happy.

JIM LEHRER: Okay. Don't go away, gentlemen. We're going to come back to you in a few minutes, because we want to get some contrary views now to this deal, and we'll come back and let you respond.