GOP OKs $1.35-Trillion Tax Cut Over 11 Years

Republican congressional leaders agreed Tuesday to seek a $1.35-trillion, 11-year tax cut--a proposal that falls short of President Bush’s signature campaign promise but that would still be the biggest tax reduction Americans have seen in 20 years.

The tax cut compromise ends weeks of effort by Bush and the GOP leaders to get as close as possible to the $1.6 trillion in tax relief over 10 years, beginning in 2002, that Bush had sought.

In the end, they failed to get much more than what was approved last month in the Senate, where a coalition of moderate Republicans and conservative Democrats scaled back Bush’s plan.

Still, the compromise gave the president much of what he wanted and signals a major break from the Clinton-era deadlock that stalled one GOP tax cut bill after another.

“This is a great day for the American people and the American taxpayer,” Bush said, adding that it would provide “meaningful, significant, sweeping tax relief, the most tax relief in a generation.”

The compromise is expected to be backed by many of the same conservative Democrats who voted for the Senate version of the budget. But it still goes too far for most Democrats to support.

“I’m still concerned, frankly, about what it will mean to our ability to provide the funding necessary for some very important investments in education and in health care,” said Senate Minority Leader Tom Daschle (D-S.D.).

On another thorny part of the budget--how much to allow total government spending to grow--GOP sources said late Tuesday that negotiators were nearing agreement on a compromise that would set growth at about 5%, with some additional funding allowed for defense and a handful of other key areas.

Bush proposed slowing growth to 4% annually; the bill passed by the Senate last month would increase it by 8%, more in tune with the budgets passed in the latter years of the Clinton administration.

“It looks like we are getting very close to an agreement” on spending, said Senate Budget Committee Chairman Pete V. Domenici (R-N.M.).

The tax and spending targets are being negotiated as part of an annual budget resolution, which sets the broad parameters for specific tax cut and spending bills to be passed later this year.

Writing these bills will be an even tougher task, as well as one with a more direct effect on individual taxpayers, than crafting the budget resolution. For instance, lawmakers will have to figure out which elements of Bush’s plan to alter or jettison to stay within the lower tax cut target.

Still, Tuesday’s agreement clears the way for Congress to enact the biggest tax cut since President Reagan’s 1981 tax relief measure.

GOP leaders hope to work out the details of the tax cut bill and send it to the White House by the Fourth of July--or maybe even Memorial Day. However, the debate likely will pit the parties against each other; it also likely will divide the GOP.

Some senior Republicans--such as House Majority Leader Dick Armey (R-Texas) and Sen. Phil Gramm (R-Texas)--say that the priority should be given to cutting income tax rates at least as much as Bush wants and that reductions to other taxes should be pared back to make it all fit.

That idea will meet resistance from lawmakers who do not want to shortchange other popular tax cuts, such as slashing taxes paid by married couples or repealing the inheritance tax. It also will run afoul of Republican moderates who do not want to cut the top income tax rate as much as Bush wants, fearing that that would make the package too skewed to the wealthy.

And along with facing tough choices among Bush’s priorities, Congress will have to balance his proposals against a growing list of alternative tax cuts favored by various lawmakers. These include a tax cut for investment income and other capital gains and tax breaks for small business.

Indeed, the tax cut wish list is expected to get $51.5 billion larger today with anticipated House approval of a bill to expand tax breaks for retirement savings by raising the limits on contributions to individual retirement accounts and 401(k) retirement plans.

The compromise on the overall size of the tax cut emerged from congressional negotiations to resolve differences between the budget resolutions passed earlier this year by the House and the Senate. The House budget--approved on a near party-line vote--made room for Bush’s full $1.6-trillion tax cut, phased in from 2002 to 2011. The House also backed Bush’s plan to let government spending increase 4% in 2002.

In the Senate, however, a handful of moderate Republicans demurred from the Bush plan, dooming its chances in a chamber divided 50-50 between the parties. GOP Senate leaders were forced to accept a resolution to decrease the tax cut to $1.18 trillion from 2002 to 2011. The Senate version also called for an $85-billion tax cut this year to stimulate the economy and bulked up spending to allow the 8% increase.

The differences over spending were still being negotiated.

Armey said that, even if the final budget resolution allows more spending than he would like, he and other House GOP leaders may try to crack down on appropriation bills as they are being drafted.

The House already has passed three specific tax cut bills that would implement major elements of the Bush tax plan. The measures would cut income tax rates across the board, reduce taxes for married couples and phase out the estate tax.

The Senate has been waiting until the budget resolution was enacted to take such action. And rather than consider a series of bills, Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) and Sen. Max Baucus (D-Mont.) have been trying to craft a single measure that attracts bipartisan support.

*

Times staff writer Edwin Chen contributed to this story.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Compromise

Negotiators reached agreement Tuesday on the target figure for a tax cut. Yet to be decided is exactly what tax laws will be changed to reach the figure.

What President Bush sought: $1.6-trillion tax cut, phased in from 2002 to 2011.

What House passed: The Bush plan.

What Senate passed: $1.18- trillion tax cut, phased in from 2002 to 2011, plus $85- billion tax cut in 2001 to stimulate the economy.

The compromise: $1.25- trillion tax cut, phased in from 2002 to 2011, plus $100-billion tax cut in 2001-2002 to stimulate the economy.