GOP leaders agree on tax-cut package


WASHINGTON -- House and Senate Republican leaders reached agreement yesterday on a $70 billion tax-cut package that would extend some expiring tax breaks and authorize new ones, particularly for upper-income taxpayers.

The bill marks a victory for President Bush, who had urged Congress to extend the temporary tax cuts enacted in his first term. Failing to do so, he argued, would be tantamount to a tax increase that could derail the economy.

Sen. Jon Kyl, an Arizona Republican who is one of the two senators who negotiated the final bill with the House, hailed the agreement as a "great day for the economy and American taxpayer."

Democrats called it another giveaway to the rich at a time of record budget deficits.

"This tax bill shows the administration's true colors," said Sen. Charles E. Schumer, a New York Democrat, "and only the very wealthy are going to see green."

The bill would extend for two years the low tax rates on investment income that are scheduled to expire after 2008. For the current year, it also would blunt the impact of the alternative minimum tax on about 15 million taxpayers.

The House is expected to vote on the bill today, and approval is likely. The bill's fate is less certain in the Senate, where some Republicans have expressed opposition to tax breaks for investment income and where no vote has been scheduled.

The bill, the first major tax cut since 2003, would cost the Treasury an estimated $70 billion over the next five years. Bush's most recent budget assumed the continuation of tax cuts of about the current size, and the bill would leave the deficit at $200 billion to $400 billion a year through the next five years, about what he had estimated.

In addition, the chief negotiators - Sen. Charles E. Grassley, an Iowa Republican who is chairman of the Senate Finance Committee and Rep. Bill Thomas, a California Republican who is chairman of the House Ways and Means Committee - said they had reached agreement on provisions of a second tax bill that would cost up to $36 billion more over five years.

The decision to split tax legislation into two bills is a result of the congressional budget process. Under arcane budget rules, a fast-track procedure that will prevent a filibuster in the Senate and allow passage by a simple majority is limited to $70 billion in tax cuts.

Of the Senate's 100 members, 55 are Republicans, but some of them, fearing the effect on the deficit and the disproportionate benefit to the wealthiest taxpayers, are reluctant to extend the low rates on the income from dividends and profits from the sale of investments, known as capital gains.

Republican Sen. Olympia J. Snowe of Maine, a Finance Committee member, said she would oppose the bill as written by Grassley and Thomas.

The second bill will not benefit from the same fast-track procedures and will need 60 votes in the Senate.

To encourage passage of the second bill, Grassley and Thomas loaded it with retroactive extensions of the most popular tax breaks that expired at the beginning of this year, including the research and development tax credit, the deduction for certain college tuition payments and deductions for teachers who pay for classroom supplies out of their own pockets.

Sen. Max Baucus of Montana, the top Democrat on the Finance Committee, criticized that strategy.

"Hard-working Americans who depend on these already expired provisions are being told not to worry, there is another bill coming down the pike to take care of them," he said. But "a different tax vehicle has a high likelihood of breaking down."

The tax package cleared the Senate and the House late last year in different forms. The Senate bill included relief from the alternative minimum tax and no extension of the lower tax rates for investment income. The House did it the other way around.

Tax writers have spent much of the past six months trying to shoehorn both provisions into one bill without violating the $70 billion fast-track limit. They did it by shifting some revenue-losing provisions to the second bill and adding small tax increases, particularly on businesses.

The tax rates for dividends and capital gains are 5 percent for taxpayers in the 10 percent or 15 percent tax brackets and 15 percent for taxpayers in higher brackets.

Under current law, the rate would go to zero in 2008 for taxpayers in the 10 percent or 15 percent bracket. But those low rates are scheduled to lapse in 2009, when dividends and capital gains would be taxed at the same rate as wages.

The new bill would extend the 2008 rates through 2010 at a cost of $21 billion in the next five years and $51 billion in the next 10 years.

Joel Havemann writes for the Los Angeles Times.

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