GOP Reaches Accord on Tax Cut Package

House and Senate Republican leaders reached agreement Tuesday 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 represents a victory for President Bush, who had urged Congress to extend the temporary cuts enacted in his first term. Failing to do so, he argued, would be tantamount to a tax increase that could derail the economy.

Jon Kyl (R-Ariz.), 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.”

But Democrats called it another giveaway for the rich at a time when the budget deficit was already at an all-time high. “This tax bill shows the administration’s true colors,” said Sen. Charles E. Schumer of New York, “and only the very wealthy are going to see green.”

The bill would extend lowered tax rates on investment income, now scheduled to expire after 2008, for an additional two years. For the current year, it 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 measure’s fate is less certain in the Senate, where some Republicans have expressed opposition to tax breaks on investment income. A vote there had not 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 this size, and the bill would leave the deficit about where he estimated it would be -- in the range of $200 billion to $400 billion a year through the next five years.

The bill’s chief negotiators -- Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, and Rep. Bill Thomas (R-Bakersfield), chairman of the House Ways and Means Committee -- said they had reached agreement on provisions of a second tax measure, which would cost up to $36 billion over five years.

The decision to split tax legislation into two bills is a result of the congressional budget process. Under arcane budget rules, only $70 billion in tax cuts can be considered in the Senate using a “fast track” procedure that prevents a filibuster and allows passage by a simple majority.

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 lowered rates on income from dividends and profits from the sale of investments, known as capital gains. For example, Sen. Olympia J. Snowe (R-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 the year, including a research and development tax credit for businesses, a deduction for certain college tuition payments, and benefits for teachers who pay for classroom supplies themselves.

Sen. Max Baucus of Montana, the top Democrat on Grassley’s 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.”

Tax packages cleared the Senate and the House late last year in very different forms. Most significantly, the Senate bill included relief from the alternative minimum tax and no extension of the lowered tax rates for investment income. The House did it the other way around.

Tax writers spent much of the last six months trying to shoehorn both provisions into one bill without violating the budget’s $70-billion 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 now 5% for taxpayers in the 10% and 15% tax brackets and 15% for those in higher brackets. Under current law, the rate will go to zero in 2008 for taxpayers in the 10% and 15% brackets. But those rates are scheduled to lapse in 2009, with dividends and capital gains scheduled to be taxed at the same rate as wages.

The new bill would extend the 2008 rates through 2010. The cost: $21 billion over five years and $51 billion over 10.

The measure’s second-most costly provision -- $34 billion in 2006 and 2007 alone -- would provide relief to the increasing millions of taxpayers who would otherwise be subject to the alternative minimum tax. Congress enacted the levy in 1969 to prevent the wealthy from sheltering most of their income from the Internal Revenue Service, but as inflation has driven wages higher, more middle- and upper-middle-income taxpayers find they must pay it. There were estimates that without the relief, nearly 30% of taxpayers earning $75,000 to $100,000 could be subject to the tax this year.

In reaching their compromise, the tax writers were mindful of a Senate rule that has the effect of requiring a 60-vote “super-majority” to pass tax legislation that would reduce government revenue in any year beyond the next five.

That led to a provision that would allow all taxpayers, no matter how high their income, to convert ordinary individual retirement accounts into Roth IRAs starting in 2010. Contributions to ordinary IRAs are tax-deductible but the withdrawals are taxed. For Roth IRAs, the situation is reversed: Contributions are taxed but withdrawals, including profits from the investments, are not.

The new IRA provision is designed to yield a bonanza to the government in 2011 and 2012. Although Roth IRAs cost huge amounts of revenue in the long term, the government would reap substantial money initially as savers pay the required taxes on ordinary IRAs converted to Roths. The new deal would allow taxpayers who convert an ordinary IRA to a Roth in 2010 to spread out the tax payments over the following two years.

The bill would also raise from 14 to 18 the age at which children’s investment income is taxed at their rates instead of parents’ usually higher rates.

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Times staff writers Willem Marx and Maura Reynolds contributed to this report.