Senate Passes $350-Billion Tax Cut Bill

By Janet Hook

May 16, 2003 12 AM PT

Times Staff Writer

WASHINGTON —

The Senate late Thursday narrowly approved a $350-billion, 11-year tax cut package, handing President Bush a hard-won if limited victory in his effort to persuade Congress that another major reduction in taxes is the cure for the ailing economy.

The bill passed, 51 to 49, after the Senate agreed to salvage Bush’s controversial proposal to eliminate taxes on dividends -- at least temporarily.

On the earlier 51-50 vote, with Vice President Dick Cheney casting the tiebreaking tally, the Senate approved an amendment to eliminate the dividend tax for three years, from 2004 through 2006. Bush wants the tax permanently abolished.

The overall bill, with its $350-billion price tag, is far smaller than the $725-billion economic recovery plan the White House initially proposed. But approval of the temporary elimination of the dividend tax could breathe new life into a core Bush proposal that had been viewed as dead by many lawmakers -- especially in the narrowly divided Senate.

“It would encourage investment, it would encourage jobs, it would encourage growth,” said Sen. Don Nickles (R-Okla.), a leading advocate of eliminating dividend taxes.

After the vote, the president commended the Senate for passing the bill, singling out its dividend provision.

Treasury Secretary John W. Snow applauded the dividend stance as “a bold step.” And he praised passage of the entire bill, even though it amounts to less than half of Bush’s original plan. “We are one step closer to giving the economy the boost it needs to grow,” Snow said.

Republican leaders won approval of the dividend tax break and passed the overall bill after they won support of two crucial swing votes -- Sens. George Voinovich (R-Ohio) and Ben Nelson (D-Neb.). Bush visited their home states in his recent campaign-style swing through the country to build support for his tax cut plan.

The legislation still faces major hurdles because the Senate bill is far different from the version approved last week by the House. That measure would cut taxes by $550 billion.

Although the House and Senate bills include a large number of similar provisions to cut income taxes for individuals and businesses, they differ on enough key issues that GOP leaders are no longer sure they can achieve the president’s goal of having the final bill on his desk by the end of next week.

The House bill, for instance, takes a very different approach on dividends -- it would cut the tax rate on them, rather than eliminate it. It does not include aid to financially strapped states, which is considered crucial to getting any bill through the Senate.

And many House Republicans loathe provisions in the Senate bill that would abolish some business tax breaks and raise taxes for Americans living abroad. These measures were included in the bill to keep its net cost to $350 billion -- the figure some moderate Republicans have said is the most they could support.

The differences in the bills will have to be ironed out in a House-Senate conference committee -- negotiations that are sure to be contentious and test already strained relations within the president’s own party.

In his statement released after the vote, Bush said, “I call on Congress to resolve their differences quickly so that I can sign a bill that will help create jobs, boost take-home pay and spur economic growth.”

Voinovich, a fiscal conservative who has led the fight to keep the bill’s cost to $350 billion, said, “There are going to be some difficult days ahead. We’re in the playoffs now, but the World Series is what comes out of conference.”

In a sign of tensions to come, House Speaker J. Dennis Hastert (R-Ill.) indicated that the Senate’s dividend tax cut will be opposed by House Republicans because it is only a temporary provision.

“It does not solve the problem,” Hastert said. “There needs to be permanence.”

But the White House prefers the Senate version. “With the White House favoring ours over what the House is doing, we will have a good chance of having ours adopted,” said Senate Finance Committee Chairman Charles E. Grassley (R-Iowa).

Even if the final bill sticks to the Senate’s $350-billion limit, it will represent a major addition to the Bush administration’s tax-cutting legacy. Just two years ago, Congress adopted a $1.35-trillion, 10-year tax cut at Bush’s insistence. It passed a smaller tax cut to stimulate the economy last year.

Major provisions that are expected to be in any final bill that emerges from Congress this year would:

* Speed up to this year scheduled reductions in income tax rates. Under the 2001 tax cut law, those reductions will not take full effect until 2006.

* Increase from $600 to $1,000 the tax credit families can take for each child.

* Provide tax relief for couples who are hit by the so-called marriage penalty.

* Expand incentives for small businesses to invest in new equipment.

In Thursday night’s final Senate roll call, California’s Democratic senators, Barbara Boxer and Dianne Feinstein, were among those voting against the bill. Democrats voting for it were Nelson, Zell Miller of Georgia and Sen. Evan Bayh of Indiana.

Republicans voting against it were Lincoln Chafee of Rhode Island, John McCain of Arizona and Olympia J. Snowe of Maine.

As approved last week by the Senate Finance Committee, the bill included only $81 billion in dividend tax relief -- a pale shadow of the administration’s $396-billion plan. The committee bill would have allowed taxpayers to exclude from taxation only their first $500 in dividend income, plus 10% of dividend income beyond that. That additional cut would have increased to 20% in 2008.

The effort to expand the bill’s dividend tax relief was the focus of heavy lobbying by GOP leaders and the White House. Administration officials were adamant that the legislation should in some way eliminate, not just cut, taxes on dividends. Bush has argued the abolition is needed to end what he calls the “double taxation” of dividends -- the fact that profits are often taxed twice, first at the corporate level and then when the money is passed onto shareholders as dividends.

The White House and GOP leaders had to struggle to pass the more generous dividend tax cut because they faced implacable opposition from three GOP senators -- Snowe, McCain and Chafee -- and support from only one Democrat, Miller.

The administration and its allies cobbled together a bare majority by winning over Nelson -- who agreed to back a bigger dividend tax cut and the final bill after GOP leaders crafted a deal for including $20 billion in aid to states.

The final crucial vote came from Voinovich, who with Snowe has been adamant about keeping the net cost of the bill to $350 billion. Voinovich was won over after he secured a commitment from GOP leaders and the White House to one of his pet priorities -- setting up a commission to study fundamental reform of the tax code.

As approved by the Senate, the dividend amendment allows taxpayers to exclude 50% of their dividend income in 2003. Then in 2004 through 2006, all dividend income would be tax-exempt. The tax would be reinstated in 2007, but proponents say they hope Congress would extend the tax break before that expiration date.

“It sends a signal to the market.... We mean for this double tax to be repealed,” said Sen. Jon Kyl (R-Ariz.).

The measure amounts to $124 billion in dividend tax relief. To make up for the increased cost, Nickles proposed trimming the tax relief provided for married couples and small businesses by $43 billion.

Democrats derided the temporary tax cut as a gimmicky maneuver to disguise the bill’s true long-term costs. And they accused Republicans of penalizing married couples to pay for bigger tax breaks for wealthy shareholders.

“This is absurd,” said Sen. Max Baucus (D-Mont.). “This is irresponsible.”

Baucus also complained that the measure was even more generous to shareholders and corporations than the Bush plan in one respect.

Bush proposed making dividends tax-free only if they are paid from corporate profits that have been taxed. Nickles’ amendment would eliminate taxes on dividends even from corporations that have paid no taxes.

Another challenge to the GOP bill was defeated when the Senate rejected, 51 to 49, an amendment by Sen. John B. Breaux (D-La.) to drop a proposed tax increase on U.S. citizens working abroad.

The Senate bill includes a provision to repeal the law that allows such workers to exempt from U.S. taxes up to $80,000 of their annual income if they also pay taxes to foreign governments. Breaux said that would undercut an important incentive for workers to accept jobs overseas. Many Republicans shared Breaux’s opposition to the tax increase but voted against his amendment because he proposed paying for it by scaling back the dividend tax cut.

A handful of amendments passed with bipartisan support, including one that was a top priority for high technology companies and multinational corporations. Under an amendment co-sponsored by Boxer and Sen. John Ensign (R-Nev.), the bill would for one year slash -- from 35% to 5.25% -- the tax corporations pay when they bring offshore profits back to the United States.

(BEGIN TEXT OF INFOBOX)

Breaking down the tax cut plans

Here are the major features -- and differences -- in the $725-billion, 11-year tax cut plan President Bush initially proposed, the $550-billion bill the House passed last week and the $350-billion measure the Senate approved Thursday. House-Senate negotiators now will try to settle their disagreements and send a final bill to Bush.

Provisions: Dividends and capital gains

HOUSE: 15% maximum rate on dividends and capital gains (5% for low-income taxpayers). Rate reduction applies to dividends paid only by U.S. companies. Expires after 2012.

Cost: $276.8 billion

SENATE: Allows taxpayers to exclude 50% of dividend income from taxation in 2003. In 2004 through 2006, all dividend income would be excluded from the tax. Applies to dividends paid by U.S.- and foreign-owned companies.

Cost: $124 billion

BUSH PLAN : Tax-free dividends, provided businesses have paid corporate taxes on that profit first.

Cost: $395.8 billion

Provisions: Accelerate phase-in of income tax rate cuts enacted in 2001

HOUSE: Lowers the current 27%, 30%, 35% and 38.6% income tax rates to the 25%, 28%, 33% and 35% rates not scheduled to take effect until 2006.

Cost: $74 billion

SENATE: Same as House.

BUSH PLAN: Same as House and Senate.

Provisions: Accelerate 2001 law’s child tax credit increase

HOUSE: Increases the child tax credit from $600 to $1,000 through 2005.

Cost: $45 billion

SENATE: Same as House but without ending the credit after 2005.

Cost: $89.8 billion

BUSH PLAN: Same as Senate.

Provisions: Small-business tax cuts

HOUSE: Increases the annual deduction of investment expenses, including software, from $25,000 to $100,000 through 2005, and expands eligibility. Expires after 2007.

Cost: $2.7 billion

SENATE: Same as House.

BUSH PLAN: Similar to Senate, but indexes the deduction to inflation and does not expire.

Cost: $28.8 billion

Provisions: A “bonus” depreciation for all businesses

HOUSE: Increases from 30% to 50% the first-year write-off for capital expenses acquired before 2006.

Cost: $21.5 billion

SENATE: None.

BUSH PLAN: None.

Provisions: Aid to states and cities

HOUSE: None.

SENATE: Creates a $20-billion aid package.