Washington — No one says it too loudly. But more and more people in this town are saying it: There may have to be a tax increase next year. As Congress grapples with tax reform and the Gramm-Rudman balanced-budget plan, President Reagan is tackling a budget for fiscal 1987 which is expected to call for draconian cuts in domestic spending.
It is likely to precipitate another tough battle with Congress after it is submitted in early February. It may even bring screams of protest from his own Cabinet secretaries, whom the President plans to brief this week.
From Mr. Reagan's viewpoint, the 1987 budget is a vehicle for pursuing his pet objective of further reducing the role of federal government.
But many lawmakers and economists question whether enough can be squeezed from the budget to get the deficit down to manageable proportions.
Deficit projections, moreover, continue to escalate.
James C. Miller, director of the Office of Management and Budget (OMB), now says that for all the efforts to trim spending, the deficit in fiscal 1986 will exceed $200 billion and may even equal the record $212 billion deficit of the previous year. The OMB August estimate of the 1986 deficit stood at $177.8 billion.
As for the coming year, Mr. Miller has told the President that the 1987 deficit will be about $194 billion. This means cutting the budget by at least $50 billion to meet the deficit target of $144 billion called for the Gramm-Rudman deficit-reduction measure.
Congress has reached tentative agreement on the plan, aimed at achieving a balanced budget by 1991. Reagan aides say the President will submit a 1987 budget that meets the Gramm-Rudman target, whether the plan passes or not.
The question is: Where will the cuts come from?
The President insists on a 3 percent real increase in defense spending. He vows not to reduce social security benefits. He cannot tamper with the growing interest payments on the national debt, now pushing more than $140 billion a year. And he continues to oppose tax increases.
This leaves about $430 billion, Miller says, or less than half of the budget, on which the President can wield his ax. And this means stringent cuts in, or elimination of, domestic programs. ``It's going to be exceedingly tough,'' an OMB official says.
Reflecting how tough, Mr. Miller put off a scheduled meeting with the President yesterday because OMB needed more time to come up with a final presentation.
White House officials are not disclosing what is in the new budget. But they point to the reductions the President proposed in his budget last February and many of which Congress turned down.
These include elimination of such programs as the Small Business Administration, Amtrak, Legal Services Administration, and community service block grants.
It is also thought Reagan will go after further cuts in such areas as medicare, medicaid, and student loans.
``Miller will find the $50 billion,'' says Allen Schick, a budget expert at the University of Maryland. ``The President is hoping that people [in Congress] will begin to see the trade-offs between the protected programs and their programs. If they want farm benefits, they have to look at the protected programs. So Reagan's gambling.''
The President is also holding to a tough line on the continuing budget resolution for fiscal 1986, hoping this will help ease the situation for 1987.
But no one thinks Congress would go along with the kind of severe reductions or liquidations of programs required to meet the Gramm-Rudman target. This is why there is more and more speculation that the President will be forced to raise taxes.
Even Senate majority leader Robert Dole and House minority leader Robert H. Michel indicate that new taxes may prove to be the only way to resolve the coming budget crunch if the President insists on his increase in defense spending.
The nation's mayors, meanwhile, are backing the House Ways and Means Committee tax-reform plan but are also pleading for the President and Congress to raise taxes and not gut domestic programs.
``If the federal government abdicates its responsibility toward municipal spending, it will do irreparable damage to the quality of life in our cities and do irreparable damage to the citizens,'' Cleveland Mayor George V. Voinovich told the annual conference of the National League of Cities this past weekend.
Some economists, critical of Gramm-Rudman as a budget tool, suggest that Congress has already done a fair amount toward reducing the federal deficit, given the policies President Reagan put in train in 1981 and '82.
If it had not reversed those policies -- including a tax decrease, steep defense increases, and cutbacks in domestic programs -- the deficit figures today would be even larger than they are.
``We've brought the deficit down to around 5 percent of GNP,'' says John Palmer of the Urban Institute. ``If Reagan's policies had been left, the deficit would be $350 billion in '85 instead of $200 billion, or about 8 percent. So they have made big progress in scaling back defense building and taking back about one-third of the tax cut.''
The shape of the fiscal 1987 budget will depend in large measure on the state of the economy.
If there continues to be modest growth, economists say, a tax increase is likely. But if there is a downturn, that would not be the time to put less money in consumers' pockets. GRAPH: US budget deficits Billions of dollars 1981 $78.9 1982 127.9 1983 207.8 1984 185.3 1985 211.9 1986e 177.8 1987e 144 to 194* Estimate * $144 billion to $194 billion range based on last week's briefing by OMB director James Miller Source: The Office of Management and Budget