House OKs Two-Year Extension of Tax Break

The Republican-controlled House voted Thursday to approve a multipurpose measure that would extend one of President Bush’s cherished tax reductions, setting up a showdown with the Senate.

The $56-billion measure was approved a day after the House passed three other tax bills that together would cost the government $94 billion over five years. Last month, the Senate passed a single $58-billion tax-cut bill. House and Senate negotiators will now try to reconcile their differences, but they are not expected to finish until early next year, if at all.

Perhaps the knottiest issue will be whether to extend the 15% maximum tax rates on capital gains and dividends. Current law calls for rates to rise at the end of 2008 to maximums of 20% for capital gains and 35% for dividends. The House bill approved Thursday would extend the 15% rates through 2010; the Senate bill includes no extension.

The differences in the two chambers’ bills underscore the divisions within the ranks of the Republicans, who outnumber Democrats in both the House and Senate.

Negotiations over a compromise tax bill will come as House and Senate Republicans face an equally tough task trying to agree on spending cuts. Both chambers have approved spending-cut bills that include other controversial items -- notably a Senate-backed proposal to open Alaska’s Arctic National Wildlife Refuge to oil drilling.

Thursday’s bill passed the House on a largely party-line vote of 234 to 197, with all but three Republicans voting for the measure and nine Democrats breaking ranks to vote for it. California House members split along party lines.

Republicans argued that a vote against the measure would be a vote to raise taxes. They also maintained that continuing the low rates on dividends and capital gains, a centerpiece of Bush’s 2003 tax cuts, was necessary to provide certainty for investors and businesses and sustain economic growth.

“Tax cuts have, indeed, done what the president said they would do,” Rep. Jim McCrery (R-La.) said at a Capitol news conference.

Democrats assailed the tax cuts for aggravating already large budget deficits. The House-passed spending-cut bill would save $50 billion over five years, $44 billion short of the lost tax revenue. House Democratic Leader Nancy Pelosi of San Francisco said it was “immoral of us to heap these deficits on our children.”

Democrats further condemned the tax cuts for disproportionately benefiting higher-income taxpayers. Rep. Lloyd Doggett of Texas said the Republicans were providing a Christmas “where only the silk stockings get stuffed.” Millionaires could use the tax break to purchase another foreign car, he said, while low-income taxpayers would be lucky to be able to buy a tank of gasoline.

McCrery responded that 20% of taxpayers with capital gains had incomes under $50,000, and that 58% report income of less than $100,000.

Rep. Stephanie Tubbs Jones (D-Ohio) said the Republicans’ implication -- that janitors would be able to share in the tax break for investment income -- was absurd. “Give me a break,” she said.

Democrats also complained that the tax cuts were skewed toward the wealthy even as the spending-cut bill that the House passed targeted the poor.

Rep. Gene Taylor (D-Miss.), whose district was devastated by Hurricane Katrina and whose own home was destroyed, scolded the GOP majority for putting tax cuts ahead of hurricane relief. “There are 12,000 Mississippians waiting on a FEMA trailer. So what do you bring to the floor? It’s tax breaks for the wealthiest 1% of America,” he said. “Tell me your priorities aren’t screwed up.”

That drew an angry reaction from Republicans, who Wednesday passed a $7-billion package of tax breaks aimed at encouraging rebuilding on the Gulf Coast. Congress has already enacted $62 billion in spending for hurricane-devastated areas.

Both the House and the Senate tax bills include an extension of the research tax credit that has been a priority of Silicon Valley.

Unlike the bill passed by the House on Thursday, the Senate measure would blunt the effect of the alternative minimum tax, enacted in 1969 to prevent the wealthiest Americans from sheltering income. But over the years, due mostly to inflation, it has extended its reach to upper-middle-income taxpayers. The House put relief from the alternative minimum tax into a bill of its own Wednesday; negotiators will have to reconcile the chambers’ different approaches to the issue.

Robert L. Bixby, executive director of the Concord Coalition, an advocacy group that lobbies for balanced budgets, noted that the House in two days had voted to cut taxes by “almost twice as much as it voted to cut spending last month.”

“With votes like this,” he said, “it is impossible to take the deficit reduction rhetoric seriously. Congress seems much more interested in cutting taxes than in restraining spending.”

Republican leaders contended that the tax cuts would stimulate the economy, and in turn create a net increase in tax revenue, a proposition ridiculed by Rep. Steny H. Hoyer (D-Md.). “Stop pretending,” he said, “that the tax cuts in this bill will magically pay for themselves.”

The vote came after Treasury Secretary John W. Snow was dispatched to shore up support among GOP House members.

Rep. Christopher Shays (R-Conn.), a moderate who supported the bill, said, “The fact is, since we reduced capital gains and dividend taxes, our economy has grown for 10 straight quarters at greater than 3.3%, and we’ve added 4.4 million jobs nationwide.”