Lawmakers strike deal on tax cuts

WASHINGTON – House and Senate Republican tax writers Wednesday reached a tentative agreement on a $350 billion tax-cut plan that is considerably smaller than what the House and President Bush wanted but appears to have enough support for quick passage.

The plan largely adopts the House’s plan to trim taxes on capital gains and stock dividends for at least five years, while lowering income tax rates and encouraging business investment.

Negotiations Wednesday evening trimmed an initial agreement by $30 billion to apparently secure the vote of Sen. George Voinovich, R-Ohio, and ensure passage in the narrowly divided Senate. But House Republicans were holding out hope that they could still win enough votes without Voinovich to expand the package to the $383 billion level originally agreed to by House Ways and Means Chairman Bill Thomas, R-Calif., and Senate Finance Committee Chairman Charles Grassley, R-Iowa. Either way, congressional Republicans expressed confidence that the measure will reach Bush’s desk by Memorial Day.

The deal marks a significant retreat for Bush, who has insisted on the elimination of all taxes on dividends paid out of fully taxed corporate earnings. Last month he dismissed a $350 billion tax cut as a “little bitty” measure, and said “at least $550 billion” in cuts were essential to revitalize the economy and create the million jobs he often has set as a goal.

But with the House balking at a temporary dividend tax elimination, the president decided that winning quick passage of the overall tax cut was more important than securing a dividend plan more to his liking.

Under the compromise, most dividends and capital gains would be taxed at 15 percent through 2008. Right now dividends are taxed the same as ordinary income, or as much as 38.6 percent for taxpayers in the highest tax bracket.

Taxpayers in the lowest two tax brackets would pay a 5 percent rate on dividends and capital gains through 2008. In 2009, those taxpayers would pay nothing on dividends. For all other taxpayers, tax rates on both capital gains and dividends would return to current levels in 2009, while lower income taxpayers would see their dividend tax rates rise to current levels in 2010.

The 2009 elimination of dividend taxes for poorer taxpayers was something of a symbolic gesture for Bush, since the vast majority of dividends go to more affluent taxpayers. About 65 million households, with taxable incomes of $47,450 for couples and $28,400 for singles, file tax returns that top out in the 10 percent or 15 percent tax bracket, according to Brookings Institution economist Peter Orszag. Of those, about 9.3 million – or 14 percent – have some dividend income. About 80 percent of dividend income goes to higher income households.

The dividend and capital gains part of the tax cut would amount to about $150 billion.

The deal also would expand the child credit (now $600) to $1,000; immediately lower income tax rates that were scheduled to phase in through 2006; end the so-called “marriage penalty;” expand investment tax breaks for large and small businesses; and grant $20 billion in aid to cash-strapped state and local governments.

Senate GOP tax aides said quick passage would ensure that paycheck withholding levels could be adjusted by July 1, so workers would see a bump in their take-home pay for half the year. About 26 million low- and middle-income families also would receive refund checks of $400 per child by the end of the summer, the aides said.

The tax cut is expected to reach the House floor for a final vote late Thursday or on Friday, with a Senate vote to follow within hours.

Thomas went along with the last-minute trim only reluctantly. He had insisted negotiators were “conforming to the letter, spirit and substance” of the agreement reached between Grassley and two deficit-conscious Senate Republicans, Voinovich and Sen. Olympia Snowe, R-Maine.

That deal promised a tax cut no larger than $350 billion through 2013. But Thomas and Grassley said the proposed $20 billion in state aid and $12 billion in child-credit refunds for poor taxpayers should be considered spending that is not subject to that limit.

Voinovich instead insisted that any package be held to a strict $350 billion limit.

That hurdle appears to have been cleared after a tense meeting between Voinovich, Thomas and Vice President Dick Cheney in Thomas’s Capitol office. A Voinovich aide said the senator would not announce his decision until he sees the final package officially drafted with a price tag, but, the aide said, “he feels very encouraged.”

There is still some other brush to clear away. Sen. Susan Collins, R-Maine, objected Wednesday to the formula that would be used to distribute the state fiscal relief. And Sen. Ben Nelson, D-Neb., whose support is important to GOP leaders, raised the same distribution questions while asserting that the House’s version of a dividends and capital gains tax cut would do little to stimulate the economy.

Moreover, Sen. Evan Bayh, D-Ind., one of three Democrats who voted for the Senate’s initial version of the tax cut, appeared to be leaning against this final version.

But GOP leaders believe they will secure the votes of Collins and Nelson, once they get Voinovich.