CLINTON BREAKS IN VETO, LINING OUT 3 BUDGET ITEMS.

In a historic first, President Clinton used the line-item veto Monday to strike down special tax and budget breaks for Wall Street, farm cooperatives and New York State, telling Congress that presidents now have a ``powerful new tool to protect taxpayers.''

The White House estimated that Clinton's veto of special-interest provisions in recently signed balanced-budget and tax-cut bills will save $615 million over five years.

The president promised even bigger attacks on ``waste and unjustifiable expenditures'' when pending appropriations bills reach his desk - unless lawmakers take the hint and become more disciplined in shaping budget measures.

The legality of Clinton's action, however, will have to await a Supreme Court ruling on expected challenges to the line-item veto law, which was enacted by a GOP Congress last year in hopes that Republican Bob Dole - not Democrat Clinton - would be the first president to use it.

Jumping on the first opportunity to use a powerful new chip in dealing with Congress, Clinton canceled:

A $317 million tax break for overseas earnings of subsidiaries of major U.S. banks, securities firms and insurance companies. The White House complained that the provision would have permitted ``substantial abuse and created major tax loopholes.''

A $200 million windfall for New York in the use of ``phantom'' taxes on health care providers to allow the state to claim a higher level of federal matching grants for Medicaid expenditures. The administration said such preferential treatment was unfair to the rest of the country and eventually could cost taxpayers $3.5 billion if other states lobbied to get the same break.

A $98 million capital-gains break for farm-product refiners and processors who sell their facilities to farm cooperatives. Critics said it was a tax giveaway for the benefit of Dallas billionaire Harold C. Simmons, a prominent backer of GOP candidates and causes, who agreed to sell a Utah sugar refining plant to a regional co-op of 1,600 sugar beet farmers.

Farm-state lawmakers said the co-ops - not Simmons - would have benefited. They argued that, with the federal government phasing out production subsidies, growers need tax incentives to help them expand into processing and other parts of the distribution chain.

Treasury Secretary Robert Rubin said Clinton reached his decision without focusing on Simmons and would approve a more narrowly tailored measure. Rubin said the vetoed provision was ``too broad'' and could have resulted in large processors getting the primary benefits and possibly never having to pay taxes.

Clinton, who had the line-item veto when he was governor of Arkansas, expressed confidence the Supreme Court will uphold his new authority.

The high court rejected earlier this year a challenge brought by Sen. Robert Byrd, D-W.Va., and other lawmakers opposed to the line-item veto on the ground they had no standing to sue because they couldn't claim adverse effects at the time.

But the justices left open the door for a full-blown constitutional review once Clinton exercised his new authority.

Until now, presidents could veto only entire bills, leaving lawmakers to use log-rolling tactics to insert provisions for favored constituents. Under the new law, Congress still can override the president with a two-thirds vote in both chambers - an unlikely prospect since debate would turn entirely on favors for special groups.

``Special interests will not be able to play the old game of slipping a provision into a massive bill in the hope that no one will notice,'' said Clinton. ``From now on, presidents will be able to say no to wasteful spending or tax loopholes even as they say yes to vital legislation.''

House Speaker Newt Gingrich, who had pleaded with Clinton not to tamper with the balanced-budget and tax-cut package, complained that he was ``blindsided.'' GOP leaders said they thought they had a deal that all provisions in the package were untouchable.

But Clinton insisted he only made a commitment to preserve items specifically involved in negotiations leading to the budget compromise.

White House aides expressed confidence Clinton will have the better of the argument because polls show strong public support for the line-item veto and Republicans were in the forefront of urging its enactment.

Senate Republican Leader Trent Lott of Mississippi conceded as much, even though he helped steer through special tax breaks that fell under Clinton's veto pen. ``Everyone knows I fought for years to give the line-item veto authority to the president,'' said Lott. ``I'm a firm supporter of the process.''

Byrd said the president now has turned into a ``superlegislator'' against the intent of the framers of the Constitution. ``The president has acted unconstitutionally,'' Byrd remarked. ``I hope the courts will move expeditiously to decide the case based upon its constitutional merits.''

Background

Presidents dating back to Ulysses Grant have advocated line-item veto authority only to be thwarted by Congresses eager to protect their constitutional power of the purse. The political balance in favor of a line-item veto began to shift in the 1980s when Ronald Reagan turned it into a special cause for conservatives.

In 1994, when Republicans took control of Congress, Gingrich included the line-item veto in their Contract With America and Clinton happily joined the crusade.

How line-item veto works

President Clinton used the line-item veto for the first time Monday. Howthe process works:

Congress passes bill

President signs bill, but vetos specific items he doesn't like within five working days

Congress has 30 working days to pass a bill of disapproval by a simple majority

President can veto that bill

Congress can override the president's veto by a two-thirds majority

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Box: (1) BACKGROUND (See text)

(2--Color) How line-item veto works (See text)