Bush Plan to End Dividend Tax in for Changes

Less than a month after President Bush unveiled his ambitious $674-billion plan to cut taxes and spur economic growth, its central pillar is falling flat on Capitol Hill, lawmakers in both parties say.

Key members of Congress -- Republicans and Democrats -- are cool to Bush’s proposal to eliminate taxes on dividend income. Some are already pushing to scale it back or supplant it with other initiatives, such as aid to financially troubled states.

“The president’s tax proposal, as sent to Congress, cannot become law,” said Sen. John B. Breaux (D-La.), a leader of a bipartisan group of centrist senators working on alternatives. “It’s headed for change.”

The list of those throwing cold water on the dividend idea reads like an honor roll of tax policymakers. The chairman of the Senate Finance Committee has said it cannot pass in its current form. The chairman of the Federal Reserve Board has privately questioned whether it would spark economic growth.

Even in the House, a bastion of Bush loyalists, the chairman of the Ways and Means Committee is noncommittal.

The key question is whether a White House preoccupied with military action against Iraq can marshal the lobbying muscle it needs for the little-understood proposal to win congressional approval -- especially at a time when the prospect of a costly war is dampening some lawmakers’ enthusiasm for a large tax cut.

“If we are going to military intervention in Iraq, it will make it tough to push any message, get any attention on the domestic side,” said Rep. Rob Portman (R-Ohio), a key Bush ally.

“The momentum isn’t there right now,” added Johanna Schneider, spokeswoman for the Business Roundtable, a leading lobbying group that strongly supports eliminating the tax on dividends. “I certainly don’t think it’s dead, but there’s a big education effort going on.”

Another potential distraction is a separate measure the administration proposed Friday that would significantly increase the amount of money Americans could contribute to tax-free savings accounts. Building support for these tax breaks could make it tougher for lawmakers to also back the elimination of the dividend tax.

The clouded outlook for ending the dividend tax has cleared the way for lawmakers and lobbyists to start promoting proposals not included in Bush’s economic stimulus plan. Manufacturers want more generous investment tax breaks. High-technology companies want permanent tax credits for research and development. Conservatives want to cut capital gains taxes. And Congress is under heavy pressure from the nation’s governors to provide aid to fiscally struggling states.

The wish lists are being encouraged by House Republican leaders, who say they may push for a tax cut even bigger than Bush wants. While publicly standing with the president, they have privately encouraged business lobbyists to aim high.

“The thing will change; [the GOP House leaders] want to work with us,” said a business lobbyist who asked not to be identified.

$364-Billion Proposal

The proposal to eliminate the tax shareholders pay on dividend income would cost $364 billion over 10 years -- accounting for more than half of the total Bush package.

Proponents argue that it would shore up the economy by boosting the stock market, encouraging investment and putting more money into the hands of shareholders.

Advocates criticize the current law because it effectively taxes dividends twice: first when companies make the money, and again when shareholders receive it as income.

Foes of the dividend tax proposal -- who include most Democrats and some Republicans -- say it costs too much, is too skewed to the wealthy and would have too little immediate effect on the economy.

The Bush proposal is likely to clear the House intact. But in the narrowly divided Senate, only one Democrat -- Zell Miller of Georgia -- supports it. So many Republicans have spoken against it that Finance Committee Chairman Charles E. Grassley (R-Iowa) has concluded that it would have to be scaled back to pass.

The bipartisan group of senators met recently with Federal Reserve Chairman Alan Greenspan, who told them that eliminating dividend taxes might be good policy in the long run but that it would not have a significant short-term effect on jump-starting the economy, according to a source familiar with the session.

Breaux said one compromise being considered is to limit the amount excluded from taxation to the first $500 of dividend income. That would reduce the cost and blunt criticism that the proposal primarily benefits the wealthy.

The economic effect of Bush’s proposal is uncertain enough that House Ways and Means Chairman Bill Thomas (R-Bakersfield) said he wants to study its “ripple effects” before taking a position.

“This is something that has not been looked at in detail,” he said.

Portman said the issue was discussed Wednesday with White House political advisor Karl Rove and budget director Mitchell E. Daniels Jr. at a House GOP leadership retreat to lay plans for this year’s legislative agenda.

“There is a general consensus that the double taxation of dividends part of the economic growth package may be the most challenging to pass,” partly because it is the element least familiar to lawmakers, Portman said.

Other elements of the president’s plan simply would accelerate tax cuts Congress already has passed, such as reductions in income tax rates, tax relief for married couples and gradual elimination of the estate tax.

Also, a separate measure the administration proposed Friday to liberalize tax benefits for savings builds on the popular individual retirement accounts familiar to lawmakers and many of their constituents.

The dividend tax cut, by contrast, has not been debated by Congress in recent years.

A top House Republican strategist said momentum for the dividend tax cut has suffered because there is no prominent, well-established political constituency propelling it.

The long fight to repeal the estate tax, by contrast, was powered by an influential coalition of farm and small-business groups; reducing taxes for married couples has been touted by religious groups.

GOP backers say the dividend tax cut should garner strong support among senior citizens because so many retirees live on dividend income. But the premier lobby for older Americans, AARP, has not weighed in. “We don’t have a position on this because we aren’t hearing from our members about it,” said Steve Hahn, an AARP spokesman.

Proponents say it is still early in the legislative process; they are working to give the idea some lift.

‘Need Concerted Effort’

The Business Roundtable last week released a study on the economic effect of Bush’s tax plan, arguing that the dividend proposal is the package’s most important element. The group will bring about a dozen corporate chieftains to Washington on Wednesday to lobby Congress.

“We need a concerted effort,” a White House official said. “It’s a challenge.”

Some administration allies are trying to undercut objections to the proposal’s price tag. They argue that government projections overstate the cost because they don’t account for economic growth likely to be spurred by cutting taxes.

An analysis by the Heritage Foundation, a conservative research group, concluded that because of this factor, the dividend tax cut would cost only $102 billion.

House Majority Leader Tom DeLay (R-Texas) wants the House to cut taxes even more than Bush asked -- in part to make Bush’s plan seem like the middle course, in part to give House members a chance to leave their mark on the bill.

“The administration is smart, and I support them, but they don’t have all the ideas,” DeLay said. “We have some.”

Lobbyists See Opening

That amounts to ringing the dinner bell for lobbyists and lawmakers with other ideas.

Business groups such as the National Assn. of Manufacturers were sorely disappointed that the Bush tax plan did not include expansion of tax breaks for business investment in plants and other capital equipment. Now these groups are more hopeful this provision will be added by Congress.

The Republican Study Group, a bloc of conservative House Republicans, wants an expansion of individual retirement accounts and a repeal of the alternative minimum tax. The minimum tax was established to ensure that individuals and corporations do not escape all tax liability through tax breaks and shelters.

The study group also is promoting a cut in taxes on capital gains.

In the House, such tax cuts may be added to the Bush plan; in the Senate, however, other approaches are more likely to supplant Bush provisions.

There is strong bipartisan interest for providing some aid to states, which are struggling with deficits and economic problems of their own. Sen. Olympia J. Snowe (R-Maine) would rather see the economic stimulus legislation drop the dividend tax cut and include $40 billion in aid for the states.

“I won’t take it as it is,” Snowe said. “I would prefer to work on issues that would rejuvenate the economy in the short term.”