WASHINGTON INSIGHT

TAX CUTS: As Congress returns to work this month with the recession continuing, talk of budget-busting tax cuts is taking center stage.

President Bush is dropping hints that he is willing to slash the Pentagon’s budget further to finance a middle-class tax reduction. The White House also is signaling that the economic growth package it will introduce later this month may include a temporary $2,000 tax credit for first-time home buyers.

Several ideas for middle-class tax relief have been floated by Administration officials as they scramble to prepare a growth package for Bush’s Jan. 28 State of the Union address, and more trial balloons are likely this month.

Meanwhile, alternative anti-recession proposals by leading Democrats continue to proliferate. The latest: Sen. Jim Sasser (D-Tenn.), chairman of the Senate Budget Committee, and Sen. Paul S. Sarbanes, (D-Md.), chairman of the Joint Economic Committee, want to suspend the 1990 budget agreement and adopt a $55-billion plan that would provide a middle-class tax cut and a further extension of unemployment benefits and would make grants and loans available to state and local governments to create jobs.