House OKs Bill Aimed at Reducing ‘Marriage Penalty’

The House on Thursday approved a bill that would provide $400 billion in tax cuts over the next 10 years for married couples and people with children, giving a powerful push to the “family friendly” elements of President Bush’s tax plan.

In a rare show of bipartisanship in a chamber that has been bitterly divided over Bush’s budget and tax plans, the bill was approved, 282 to 144, with 64 Democrats joining all voting Republicans in support.

The bill aims to reduce the “marriage penalty,” a quirk in the tax code that forces almost half of all couples to pay more in taxes after they marry than if they had remained single and filed individually.

But the bill goes far beyond addressing that anomaly, giving tax cuts to all married couples--not just those hit by the penalty. And it includes provisions to gradually double the $500-per-child tax credit that families now receive.

The strong bipartisan vote was a tribute to how many members of both parties have made a campaign issue of reducing the marriage penalty. What’s more, House Republicans--sensitive to charges that Bush’s tax cuts are too heavily geared to the wealthy--made changes in his proposal that channel more of the family tax breaks to those in lower-income brackets.

The family tax cuts are the second element of the Bush tax plan to clear the House. Earlier this month, the House voted along party lines to approve across-the-board cuts in income tax rates--the centerpiece of Bush’s plan to reduce taxes by $1.6 trillion over 10 years.

Next week, the House will vote on a bill to gradually eliminate the estate tax, another element in Bush’s plan. But, as approved Thursday by the House Ways and Means Committee, the measure would phase out the tax more gradually than the president proposed. The bill also would replace estate taxes with increased taxes on capital gains accrued when an heir sells an inherited asset.

House GOP leaders made these changes in response to estimates showing that implementing Bush’s repeal would be prohibitively expensive.

The focus of the bill passed Thursday by the House is to reduce the marriage penalty, paid by about 42% of all joint filers. The penalty hits hardest on two-earner families. An estimated 25 million married couples pay an average of $1,400 more than if they had remained single. As a result, proponents of the bill argued, the tax code provides a financial disincentive for couples to get married.

“If young people fall in love and get married, the federal government should applaud them, not tax them,” said House Majority Leader Dick Armey (R-Texas).

Some Democrats complained that the GOP bill cut taxes too much for upper-income couples. They said it contributed to the risk that Bush’s overall $1.6-trillion tax cut would send the government’s budget back into deficits.

“We should be more reticent to take this risky riverboat gamble,” House Minority Leader Richard A. Gephardt (D-Mo.) said. “This is a 20-year decision of this body. It is easy to make this decision. It is hard to correct it.”

Still, for many Democrats, it was difficult to oppose the bill because they had supported similar measures previously. “From my farmers market to my supermarket, this is one of the most important tax breaks my constituents talk to me about,” said Rep. Tim Roemer (D-Ind.), who voted for the bill.

In the California delegation, all Republicans supported the bill, as did six Democrats. The Democrats were Reps. Lois Capps of Santa Barbara, Gary A. Condit of Ceres, Susan A. Davis of San Diego, Jane Harman of Rolling Hills, Adam B. Schiff of Burbank and Ellen O. Tauscher of Pleasanton.

As approved by the House, the bill would:

* Allow more of married couples’ income to be taxed at the bottom tax rate of 15%. It would do that by widening the 15% bracket so that it would eventually be twice the size of the bracket for single taxpayers. This change would not be fully implemented until 2009.

* Increase the standard deduction for couples so that it would be twice the size of the deduction for single taxpayers.

* Raise the income threshold for low-income couples to qualify for the earned income tax credit, which provides relief for working couples.

For families with children, the bill follows the Bush plan and would increase the child credit from $500 now to $1,000 in 2006. But the House bill would make the first step of the increase effective in 2001, instead of 2002, as Bush proposed.

The House rejected Bush’s proposal to allow more upper-income people to qualify for the credit by raising the eligibility income ceiling from $110,000 to $200,000 for married couples.

The House bill also would expand relief to lower-income working families whose tax liability is too low to take full advantage of the child credit. Under current law, such families can receive refunds up to the amount they owe in payroll taxes if they have three or more children. The House bill would allow those partial refunds to all families with children.

The House version of the estate tax bill that comes up for floor debate next week would provide $193 billion in relief over 10 years--compared with the $267-billion bill Bush proposed. The House bill costs less, in part, because it would not completely eliminate the estate tax until 2011; Bush wanted it repealed by 2009.

Right now, only about 2% of people who die actually pay the estate tax because it applies only to inheritances in excess of $675,000, a threshold that is scheduled to rise to $1 million later this decade. There has been strong bipartisan support for reducing or repealing the estate tax because many farmers and small-business owners have complained that heirs are forced to liquidate their inheritances in order to pay taxes that reach as high as 55%.

In an important change from Bush’s proposal that would help reduce its cost, the House bill changes the way capital gains are calculated when an heir sells an asset. Under current law, capital gains taxes are owed only on the difference between the value of an asset at the time it was inherited and when it is sold.

The House bill would change that, calculating the capital gain of an inherited asset by comparing its value at the time of sale to its value when the individual who died acquired it--often many years earlier. That means an heir could face much larger capital gains taxes when the asset is sold.

The bill would, however, exempt assets up to $1.3 million for any heir--and up to $4.3 million for a surviving spouse.