Senate OKs Tax Relief

The Senate passed a $1.35-trillion, 11-year tax cut Wednesday, handing President Bush a major victory and all but ensuring that Congress will soon approve the largest package of tax relief in 20 years.

In the 62-38 vote, 12 Democrats joined all 50 Republicans in support of the bill, which appeared likely to become one of the final achievements of the Senate’s Republican leadership. The Senate is braced for a shift to Democratic control if Sen. James Jeffords of Vermont, as expected, announces today that he is quitting the Republican Party.

Immediately after the tax cut vote, a House-Senate conference committee began negotiations that could quickly lead to a compromise between the Senate bill and the $1.6-trillion tax cut already passed by the House.

The Senate, like the House, has now approved lower income tax rates across the board, although the Senate would concentrate more of the benefits at the low end of the income scale. Both chambers have also endorsed additional tax reductions for married couples, a larger tax credit for children, more liberal retirement accounts and relief from estate taxes.

The House-passed bill closely tracked Bush’s initial proposal, and the Senate bill included many of Bush’s provisions in somewhat scaled-back form. Tax cut proponents predicted that House and Senate negotiators would iron out their differences quickly enough for a final bill to sail through Congress by the end of the week, while the Senate remained in Republican hands.

“Tax relief is on the way,” declared an enthusiastic Bush, who has made the tax cut his paramount domestic goal. Urging Congress to reach a rapid final accord, he said at the White House: “Our economy cannot afford any further delays.”

Sen. Trent Lott (R-Miss.), whose reign as Senate majority leader appeared to be drawing toward a close, expressed optimism that tax relief would soon become law.

Republicans cheered the vote as an emphatic statement that Americans should be able to hold on to more of their income rather than ship it to Washington. They expressed hope that tax relief would infuse the economy with new vigor.

An amendment by Sen. Orrin G. Hatch (R-Utah) to make permanent a business tax credit for research and development was added to the bill Wednesday. The tax credit, scheduled to expire in 2004, is a favorite of high-tech firms. It could be worth $47 billion over 10 years, according to Hatch’s staff.

But most of the 54 amendments proposed to the bill during three days of rancorous debate were offered by Democratic opponents, who complained that its benefits were skewed toward the wealthy and that it could ultimately starve the federal government of the funds necessary for domestic spending needs. Some of these amendments came within a few votes of passing.

“I believe with all my heart we will regret the day this passed the Senate,” said Sen. Tom Daschle (D-S.D.), who appears to be on the verge of becoming Senate majority leader. The tax cut, he added, “crowds out and eliminates” Congress’ ability to steer future resources into other priorities, including domestic health care spending and debt reduction.

The tax debate unfolded against a backdrop of extraordinary turmoil as senators awaited Jeffords’ expected decision to become an independent. Several senators said they believed a House-Senate conference committee would finish the tax bill before any shift in Senate control complicated the outlook.

“I don’t think there’s much of a cloud over this tax bill,” said Sen. Max Baucus of Montana, the top-ranking Democrat on the Finance Committee and chief co-sponsor of the tax bill.

Under the plan taking shape Wednesday, members will vote on the final, negotiated tax bill before the end of the week--and before Democrats formally regain control of the Senate.

During a military re-enlistment ceremony in the White House East Room, Bush went out of his way to point out the support he received from three Democratic senators: Baucus, Zell Miller of Georgia and John B. Breaux of Louisiana.

“The economy needs a shot in the arm,” Bush said. “So I call on the House and the Senate to reach an agreement on the final tax relief package this week. The sooner the Congress completes its work, the sooner the American people will have their own money in their own pockets to save and invest as they see fit.”

Lawmakers said Wednesday that the final bill would be based on the Senate version rather than the larger House tax cut, which was closer to Bush’s initial proposal.

Under the Senate plan, the lowest tax rate would be cut from 15% to 10%, retroactive to Jan. 1. The House bill would cut the rate only to 12% as of Jan. 1, to 11% in 2003 and 10% in 2006.

At the top of the tax brackets, by comparison, the Senate bill would offer slower relief. The highest tax rate would slip from 39.6% to 36% by 2007 under the Senate bill. The House bill would fold today’s two top rates--39.6% and 36%--into one and reduce it to 33% by 2006.

Under the Senate bill, the $500-per-child tax credit would rise gradually to $1,000 in 2011, with the first step--to $600--retroactive to Jan. 1.

The estate tax would be scaled down until it vanished in 2011. Annual caps on tax-favored contributions to independent retirement accounts--currently $2,000--would rise to $5,000 by 2011.

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Two Plans for Tax Cuts

The House and Senate have different proposals for cutting taxes. The two plans will now go to a conference committee, where the differences can be resolved. A look at the two plans:

Total cost through 2011

Senate

$1.35 trillion

House

$1.6 trillion

*

New income tax bracket

Senate

The lowest rate--applying to the first $6,000 of a single filer’s taxable income and $12,000 for married couples--would be reduced to 10% from 15%, retroactive to Jan. 1.

House

The new lowest rate would be 12%, retroactive to Jan. 1. It would drop to 11% in 2003 and 10% in 2006.

*

Other brackets

Senate

By 2007

Old Rate: 39.6%; New Rate: 36%

Old Rate: 36%; New Rate: 33%

Old Rate: 31%; New Rate: 28%

Old Rate: 28%; New Rate: 25%

House

By 2006

Old Rate: 39.6%; New Rate: 33%

Old Rate: 36%; New Rate: 33%

Old Rate: 31%; New Rate: 25%

Old Rate: 28%; New Rate: 25%

*

Child tax credit

Senate

The $500-per-child credit would rise to $600, retroactive to Jan. 1. It would gradually increase, reaching $1,000 in 2011.

House

The credit would rise to $600, retroactive to Jan. 1. It would increase $100 a year, until reaching $1,000 in 2006.

*

Marriage penalty

Senate

Reductions in the so-called marriage penalty, under which married couples filing jointly pay more taxes than if they filed as individuals, would occur in 2004 and 2005

House

Relief would be phased in from 2001 to 2004

*

Estate taxes

Senate

The estate tax would be gradually cut and the amount exempt from the tax increased. The estate tax would be repealed in 2011; at that point, heirs who sold inherited assets would pay more in capital gains.

House

The estate and gift taxes would be gradually cut, then repealed in 2011. At that point, heirs who sold inherited assets would pay more in capital gains.

*

Education costs

Senate

Annual limits on tax-free contributions to education savings accounts would increase to $2,000 from $500, with withdrawals allowed for elementary and secondary education as well as college expenses. A new deduction, worth $5,000 a year by 2004, would be allowed for college tuition expenses. But the provision would expire in 2005.

House

No provisions.

Retirement accounts

Senate

Annual limits on tax-favored contributions to traditional IRAs and Roth IRAs would rise to $5,000 by 2011. Annual contribution limits for 401 (k)s and other retirement plans would rise to $15,000 from $10,500 by 2010.

House

The limits on the contributions to both types of IRAs would rise to $5,000 by 2004. The limits for 401 (k)s and other retirement plans would rise to $15,000 from $10,500 in 2006.

*

Times staff writers Janet Hook and James Gerstenzang contributed to this story.