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Senate leaders propose retroactive income tax cut

THE BALTIMORE SUN

WASHINGTON - Moving quickly to deliver the tax cuts pushed by President Bush and endorsed by Congress, the Senate's chief Republican and Democratic tax-writers offered a plan yesterday calling for income rate cuts - worth about $300 per taxpayer - retroactive to the start of the year.

The bipartisan legislation, which the Senate Finance Committee is expected to approve next week, includes a broad range of other benefits for families, businesses, students and retirees, to be phased in over the next decade at a cost of $1.35 trillion.

The package, crafted by Sens. Charles E. Grassley, the Iowa Republican who is chairman of the Finance Committee, and Max Baucus of Montana, the top committee Democrat, is similar to the $1.6 trillion tax cut plan that Bush proposed.

But at the insistence of Baucus and some Republican moderates, it shifts some benefits from upper-income taxpayers to benefit the low- and moderate-income.

For example, the tax rate in the highest bracket would drop from 39.6 to 36 percent, not the 33 percent Bush sought. The lowest bracket - now 15 percent - would be cut to 10 percent, retroactive to Jan. 1.

To achieve this change, the government would start withholding less money from paychecks. Tax rates on the remaining brackets would be cut gradually by 2007, a year later than Bush wanted.

In a further moderation of Bush's plan, the committee proposal would let an additional 16 million low-income families receive the child tax credit through a refund. And some low-income people for the first time would qualify for retirement savings plans.

"By reducing the tax burden, Congress can improve the quality of life of families working to make ends meet and clear the path to long-term economic growth," Grassley said.

The package includes many key elements of the Bush plan, including an easing of the "marriage penalty" that affects many two-earner couples and a phase-out of the estate tax. But it delays most of the benefits for at least five years to meet the $1.35 trillion tax cut target set by the budget blueprint Congress passed this week.

Committee leaders found room, though, to boost benefits for contributions to IRAs and 401(k) retirement plans and provide greater tax breaks for tuition.

Grassley said he was confident that a majority of his committee, divided equally by party, would vote for the measure next week and send it to the full Senate for action by the end of the month.

But the bill is still open to changes in the committee and in the full Senate. After Senate action, negotiators will have to reconcile differences with tax-cut legislation that has already passed the House.

"This is a very good bipartisan beginning," said Baucus, who broke with his party's leaders and acknowledged that he could not speak for all 50 Senate Democrats. "But it is only a beginning."

Senate Democratic leader Tom Daschle called the committee bill "nearly as flawed as the Bush tax cut plan on which it is based" and served notice that he would try to reshape it with amendments.

"Like the president's plan," Daschle said, the committee bill "disproportionately benefits the wealthiest Americans at the expense of about 72 million middle-class taxpayers."

But Baucus contended that under the deal, "there is a clear shift toward low- and particularly moderate-income Americans."

Bush called on Congress to pass the tax-cut package as quickly as possible, arguing that the extra money would invigorate the economy and help Americans pay for the soaring cost of fuel.

"Let's get the tax relief done and do it quickly," Bush said at a news conference. "I'm confident that if they have the will to do so, they can get this thing done before Memorial Day."

Under pressure from lawmakers to cut federal gasoline taxes or find some other short-term means to ease surging prices at the pumps, Bush adopted a new approach yesterday. He argued that enacting the tax cut bill was the surest way to help consumers cope with higher energy prices.

"Give people more of their own money so they can meet their bills," Bush said. "Give people money in order to be able to deal with this [fuel price] situation. If I had my way, I'd have it in place tomorrow."

The committee plan calls for $100 billion in tax relief this year and next. That would be achieved by dropping the lowest tax bracket to 10 percent from 15 percent - which would benefit all taxpayers - and raising the $500-a-child tax credit to $600 next year.

The rate reduction would put an additional $300 in the pocket of single taxpayers, provide $600 for married couples and $500 for a single head of household. Raising the child tax credit would mean an additional $100 per child.

The administration has been cool to the idea of suspending or reducing the 18.4-cents-a-gallon federal gasoline tax, which pays for roads and other transportation needs. The energy policy Bush is to unveil Thursday is expected to focus on increasing domestic supplies of oil and natural gas, turning coal into electricity more efficiently and expanding nuclear power use.

Bush said yesterday that he would "listen to everybody's suggestions." But he warned, "There is no such thing as immediate supply. This is a situation that has been developing over the years and is going to take a while to correct."

The stage was set for speedy action on the tax cut legislation once the Senate gave final congressional approval Thursday to a budget blueprint that calls for $1.35 trillion in tax relief over the next 11 years.

The House has enacted major elements of the Bush tax cut plan largely intact. But Senate tax-writers are taking the lead in shaping the tax package because its membership - divided 50-50 along party lines - all but dictates that Republicans seek a compromise with Democrats to pass legislation.

Tax relief features

The 11-year, $1.35 trillion package proposed by Sens. Charles Grassley, Iowa Republican, and Max Baucus, Montana Democrat.

TAX RATES - Bottom 15 percent tax rate lowered to 10 percent, retroactive to 2001. Applies to first $6,000 of taxable income for single people, $12,000 for married couples filing jointly. Other rates drop 1 percentage point each in 2002, 2005 and 2007. Rates drop from 39.6 percent to 36 percent; 36 percent to 33 percent; 31 percent to 28 percent; 28 percent to 25 percent. Income limits on itemized deductions adjusted upward in 2009.

CHILD CREDIT - Child credit rises from $500 to $600 effective this year, so it could be claimed on next year's tax forms. Rises in $100 steps to $1,000 by 2010. Income limits stay same. Taxpayers earning more than $10,000 who generally owe no income tax could claim a credit of 15 percent of their earnings above that income level. They cannot claim the credit now.

MARRIAGE PENALTY - Standard deduction for married couples raised so that it is equal to twice that of single taxpayers, gradually from 2006 to 2010. If in effect this year, the deduction would be $9,100 instead of $7,600 for a married couple. Bottom tax bracket enlarged so it applies to more of a married couple's income, equal to twice that of singles. Phased in from 2006 to 2010. If fully in effect this year, the lowest tax rate would apply to $54,100 of a couple's income instead of $45,200. Income limit expanded for earned income tax credit by $3,000.

ESTATE TAX - Tax repealed in 2011. Immediately drops top 55 percent rate to 50 percent and eventually to 45 percent. Raises current $675,000 individual exemption to $1 million in 2002, $2 million in 2004, $3 million in 2006 and $4 million in 2010. Retains tax on certain gifts but reduces rate to 40 percent.

RETIREMENT - Gradually raises tax-favored contribution limits for individual retirement accounts and Roth IRAs from $2,000 to $5,000. No change in income limits. Gradually increases tax-deferred contribution limits for 401(k)-type plans from $10,500 to $15,000. Credit for lower-income people of half of contributions up to $2,000.

Associated Press

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