WASHINGTON - The Senate endorsed last night a top priority of President Bush, narrowly passing a measure that would suspend taxes on stock dividends for three years. But the 10-year, $350 billion package falls well short of the deeper tax cuts that Bush says are needed to energize the economy.
The 51-49 vote presages the difficult road ahead for the measure, which must be reconciled with a far different House bill. The House has passed a $550 billion measure, but it fails to achieve Bush's top priority of repealing the tax that shareholders pay on dividends.
The measure passed after the Senate spent the day beating back dozens of Democratic amendments. Those proposals sought to eliminate tax cuts for wealthier taxpayers and investors in favor of credits for low- and middle-income people, jobless benefits, more help for states struggling with budget gaps, and guarantees that key programs such as Social Security and Medicare would be adequately funded in future years.
Vice President Dick Cheney was on hand in the Senate chamber to break a possible tie on the measure, but his vote was not needed after three Democrats - Evan Bayh of Indiana, Zell Miller of Georgia and Ben Nelson of Nebraska - joined 48 Republicans in supporting the bill. Three Republicans - Lincoln D. Chafee of Rhode Island, John McCain of Arizona and Olympia J. Snowe of Maine - joined 45 Democrats, including Paul S. Sarbanes and Barbara A. Mikulski of Maryland, and one independent in voting no.
Earlier in the evening, Cheney cast the deciding "aye" on a 50-50 vote to approve the dividend proposal. It would phase out over two years the tax that shareholders pay on corporate dividends, suspending it from 2004 to 2007, when dividends would again be taxed as regular income.
Like Bush's plan, which proposed the immediate elimination of dividend taxes, the Senate measure would cut individual income tax rates across the board, accelerating tax cuts scheduled as part of a 2001 law. It would provide incentives for businesses to invest. And it would immediately increase the child tax credit and change parts of the tax code that penalize married couples.
"I think the president has had some tremendous victories today," said Sen. Charles E. Grassley, the Iowa Republican who chairs the Finance Committee. "This is something that will respond to the needs of our people, creating jobs."
The bill's tax cuts total about $422 billion, and it also includes $20 billion in aid to the states over the next two years, half to help them fund Medicaid and the rest to pay for other state and local programs. Including the state funding was crucial to winning support for the tax cut among moderate Republicans and Nelson.
To stay within budget constraints that limited the Senate to a package of $350 billion, the measure contains some $92 billion in tax and fee increases.
Democrats strenuously opposed the measure, arguing that it was far too large a tax cut given the nation's worsening budget deficits. Congressional analysts estimated this week that the deficit will top $300 billion this year. They have previously projected that deficits will persist through the next decade.
If Congress cut taxes at all, Democrats asserted, the benefits should go to low- and middle-income families that would spend extra cash, thus pumping more money into the economy.
"We're talking about providing meaningful help to the vast majority of American taxpayers who need help now, who can be spurred with economic incentives," said Senate Minority Leader Tom Daschle, a South Dakota Democrat.
The Senate rejected, 54-46, Daschle's $152 billion alternative, including a package of tax credits, an extension of unemployment benefits, $40 billion in aid to states and business investment tax breaks.
Republicans countered that their proposals would help everyone by spurring business and individual investment that would lead, in turn, to economic growth, creating needed jobs.
The package, said Sen. Jon Kyl, an Arizona Republican, "will provide the economic growth that will provide the revenues to the Treasury that will enable us to afford not just the tax cuts but all of the other things that we know we're going to need to be spending on."
The state aid and the tax increases in the Republican measure have provoked the ire of some conservatives, who are likely to fight to remove them or sharply scale them back when House and Senate negotiators begin meeting, probably next week, to resolve the differences between their bills.
The House earlier this month passed a $550 billion tax-cut measure with many of the same elements as the Senate plan. But like the president, House members included neither help for states nor provisions to help make up for its cost.
But Grassley said the Republican Congress would have to accept the state fiscal aid if it wanted a tax bill to become law.
"The state and local help was very, very essential, and I don't see how we can pass a bill out of conference without some help for state and local governments," Grassley said.
Grassley pledged earlier this year not to return from the conference with a tax cut of more than $350 billion, and yesterday's votes indicated that the Senate might not support one.
But Bush and many Republicans are determined to expand the package. Bush has urged Congress to send him a final tax-cut bill before members leave May 23 for a weeklong Memorial Day recess. But at least one top leader cast doubt yesterday on that prospect.
"That might be a little quick," said House Speaker Dennis Hastert, an Illinois Republican. House Republicans also have criticized the temporary nature of the Senate's dividend tax proposal. The Senate's $124 billion provision would make half of dividends tax-free in 2003. Then it would eliminate the tax altogether for three years and allow it to return to its top rate of 38.6 percent in 2007.
Senate leaders put an end-date on the provision only grudgingly, to keep its costs within tight budget constraints. Also to keep costs down, senators scaled back the tax breaks for married couples.
The House opted instead for a roughly $277 billion proposal to drop the dividend tax rate to 15 percent for upper-income shareholders and 5 percent for others. The House bill would also cut capital gains rates - now 20 percent and 10 percent, respectively - to the same levels.
Budget watchdog groups expressed disapproval of the Senate's temporary dividend cut and other tax provisions that expire after a few years, saying they are a sneaky way of achieving a more expensive long-term proposal because lawmakers know the tax cuts would probably be extended.
"It's either bad economics or dishonest budgeting," said Robert L. Bixby, the executive director of the Concord Coalition. "You have tax provisions blinking on and off like a pinball machine - it's absurd."
Montana Sen. Max Baucus, the senior Democrat on the Finance Committee, called the dividend proposal a "yo-yo tax cut - now you see it, now you don't." He said it was "irresponsible" and "an outrage."
The Senate voted, 50-50 with Cheney casting the deciding vote, to approve the plan, offered by Budget Committee Chairman Don Nickles, an Oklahoma Republican. Nelson and Miller joined Republicans to support the proposal. Chafee, McCain and Snowe joined 47 Democrats in voting no.
The Senate rejected, 51-49, an attempt by Sen. John B. Breaux, a Louisiana Democrat, to maintain a tax break that allows U.S. citizens to earn up to $80,000 a year in foreign income tax-free.