Panel Sends Bush Tax Plan to Floor, Studies Alternative : Legislation: House Democrats reject streamlined version of President’s package and begin work on proposal stressing middle-class aid.

Democrats on the House Ways and Means Committee voted Wednesday to send President Bush’s tax-cut package to the House floor intact, then began work on a Democratic alternative that is expected to contain a broad tax reduction for the middle class.

Led by its Democratic majority, the committee first voted, 23 to 13, to reject a streamlined version of the President’s plan that the GOP favored and then voted, 22 to 14, to send his original 49-point package to the House floor. Both votes were essentially along party lines.

In sending Bush’s original plan to the floor, the panel did so “without recommendation”--meaning that it did not actually endorse the proposal. That action paves the way for the Democrats to act on their alternative plan--and for an eventual partisan battle when the House takes up the bill.

Republicans on the committee were outraged by Wednesday’s action. Rep. Bill Archer of Texas, the ranking GOP member, said that it was designed to give the Democrats “partisan one-upmanship. The American people are going to see through that.”

The partisan debate is focused on Bush’s request that Congress pass seven “economic stimulus” measures by March 20 to help jar the economy out of the recession, which has become a critical issue in this election year. Democrats want to write their own version of the legislation, with more tax cuts for middle-income Americans to be financed by increased taxes on the wealthy.

Committee Democrats are not expected to complete work on their alternative proposal until Saturday, with plans to call it up on the House floor late this month or early in March.

The next skirmish will come in the House Rules Committee, which will set the limits on amendments and floor debate. Since that panel also is controlled by Democrats, it is likely to approve procedures that will make it easier for party members to substitute their bill.

Although Bush’s initial proposal contained a small tax cut for families--a $500-per-child increase in the personal exemption, which is now $2,300 a person--that provision and his proposal for a new, more flexible individual retirement account for such things as education were omitted from the Republican legislators’ streamlined version.

That plan, endorsed by the Administration early last week, also would have made Bush’s proposal to cut tax rates on capital-gains--profits from the sale of stocks or other assets--more generous for upper-income taxpayers.

The reason for the slimmed down package were twofold: Bush had already asked Congress to quickly enact the “economic stimulus” measures. And Republicans feared that under congressional budget rules enactment of some of the proposals in the full Bush package, such as the increase in the personal exemption, would require Congress to offset the cost by cutting spending or raising taxes elsewhere.

GOP strategists worried that their result could be a companion fight over budget cuts that could block the President’s package until after the November presidential election. Bush asked instead in the streamlined plan that Congress enact seven “emergency” provisions now and pass the remainder later in a second bill.

But that strategy received another setback Wednesday when Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, joined Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) in rejecting the notion that Congress pass two tax bills this year.

“I just don’t think we can do that,” Bentsen said as his panel opened hearings on the President’s tax-cut plan. “I think it has to be one bill--one package.” Rostenkowski had earlier made the same point.

The Finance Committee has scheduled a draft session on its version of the President’s package for Feb. 25. It is not clear yet what approach the panel will take, but Bentsen is known to favor enacting a $300 tax credit for middle-income taxpayers to be financed by cuts in defense.

The Democrats’ maneuvering at the Ways and Means Committee session Wednesday had been scripted in advance by the House Democratic leadership.

House’s Tax Bill Choices

The President’s full tax plan and a shorter version will be considered by the full House, probably in late February or early March. Members will have these choices:

President’s Long-Term Plan

Bush’s total tax plan, including:

A capital-gains reduction.

An increased personal exemption for children.

A tax credit of up to $5,000 for some home buyers.

Expanded individual retirement accounts.

Penalty-free IRA withdrawals for home buyers and medical and education expenses.

A deduction for interest on student loans.

Special tax relief for real estate professionals.

A temporary incentive for businesses to buy equipment.

Financing: The tax cuts would be paid for by various accounting changes that critics say are gimmicks and by several targeted tax increases, including those on certain state and local government workers, credit unions, securities dealers and annuities.

The Short-Term Bush Plan

A streamlined version of the Bush plan includes:

A more generous capital-gains reduction.

The home buyers’ credit.

The incentive for business equipment purchases.

The special benefit for real estate developers.

Financing: These would be paid for without any spending cuts or tax increases. Most of the money would come from accounting changes for the government agency that insures pension plans.

The Democratic Substitute

This plan has not been drafted yet but is likely to contain:

A temporary credit for wage earners.

Incentives for home buying.

Investment incentives, perhaps even some version of a capital-gains reduction.

Financing: This would be paid for by creating a new, fourth income tax rate of 35%, which generally would affect couples in the $200,000 range and singles at $100,000 and above. Also, a 10% surtax would be imposed on individuals with annual incomes above $1 million.

Source: Times staff and wire reports