Lawmakers Reach Deal on Tax Relief

House and Senate negotiators reached agreement Friday on a compromise $1.35-trillion, 10-year tax cut that would slash income tax rates across the board, phase out the estate tax and give every taxpayer a rebate as early as this summer.

The agreement cleared the way for the House and Senate, in special Saturday sessions, to approve the final tax bill and send it to President Bush by Memorial Day. He had asked lawmakers to finish work on the bill by then so he can quickly sign it into law, in hopes of speeding some fiscal relief to taxpayers to help stimulate the economy.

The compromise bill, crafted by a small bipartisan group of senior lawmakers, represented a major legislative victory for Bush at a time when he is still smarting from a bruising political defeat: the loss of Republican control of the Senate as a result of the decision by Sen. James M. Jeffords of Vermont to quit the Republican Party.

“As a result of this landmark tax agreement, the American taxpayers will have more money in their pockets to save and invest,” Bush said after the congressional accord was announced.

The tax cut legislation apparently will be the last hurrah for the GOP-controlled Senate, which will revert to Democratic control when Jeffords’ departure from the GOP takes effect June 5.

One key part of the tax cut will apply retroactively to Jan. 1: the reduction of the rate on the lowest tax bracket to 10% from 15%. That new rate would apply to the first $6,000 of taxable income for single filers and the first $12,000 of income for married people.

With that cut, the Treasury Department will send out rebate checks of up to $300 for individual taxpayers, $500 for single parents and $600 for married couples--checks that could arrive by late summer.

Other major provisions of the bill would:

* Cut the top income tax rate from 39.6% to 35% by 2006. The rates in other brackets would be reduced by 3 percentage points, with part of the cuts to take effect immediately and be reflected in lower paycheck withholdings after July 1.

* Gradually double the $500-per-child tax credit for families.

* Increase the standard deduction for couples and provide other tax relief for married taxpayers. These reductions will not start immediately and will be phased in over the next decade.

* Provide a new tax deduction for college tuition.

* Repeal the estate tax in 2010, gradually reducing its rates in the meantime.

* Increase the amount of money people can contribute to their individual retirement accounts and 401(k) plans.

The compromise bill does not cut income tax rates as much or as quickly as Bush wanted. It also takes longer than Bush wanted to eliminate the estate tax, double the child credit and provide relief to married couples. Overall, it provides only $1.35 trillion of the $1.6 trillion in tax cuts he wanted.

Still, the measure provides the largest tax cut in 20 years--and far more than was politically possible before Bush became president.

“This is a startling turnaround compared to where we were in January, when most of the smart money would have bet we were not going to get tax relief this year,” Treasury Secretary Paul H. O’Neill said.

Two conservative Democrats--Sen. Max Baucus of Montana and John B. Breaux of Louisiana--helped craft the compromise and many others are expected to vote for it. But Democratic leaders continued to attack the bill as a recklessly large tax cut that is too skewed to the wealthy and will drain resources from other government priorities, such as debt reduction and social programs.

“They call it a tax bill, but it is really a formula for depriving Social Security and Medicare of needed resources,” Rep. Charles B. Rangel Jr. (D-N.Y.) said Friday. He accused Republicans of trying to ram the bill through Congress before Memorial Day so Bush “can take his victory lap over the holiday weekend.”

But Baucus, who is facing a potentially difficult fight for reelection in 2002 in a state Bush easily carried last year, defended his role in crafting the bill.

“This is a lot better tax cut than would have been the case” if Democrats had not helped work on it, Baucus said.

The compromise measure resolved differences between the House and Senate versions of the tax cut details. The dispute centered on how much to cut income tax rates that apply to the wealthy and how much relief to give the poorest taxpayers.

The negotiations amounted to a debate between the House GOP majority, which passed Bush’s tax plan largely intact, and a bipartisan group of senators who supported a lower overall figure and wanted to change the bill’s balance so that lower- and middle-income people get more of the benefits.

Bush had requested $1.6 trillion in tax cuts over 10 years, from 2002 to 2011. The compromise starts some elements of the tax relief in 2001, though major provisions are delayed longer than Bush sought. That’s in part because negotiators found they could not afford to start them as quickly as the White House wanted.

Critics called this a bookkeeping gimmick that helps disguise the true cost of the bill.

For technical reasons, the whole bill expires in 2010, meaning the relief would have to be reenacted. As of now, most lawmakers--including the bill’s opponents--expect most of its provisions to stay on the books.

Some income tax rate reductions will be phased in beginning July 1, producing larger paychecks for workers this year as employers withhold less taxes.

The top rate of 39.6% would drop to 35% by 2006; the lower bracket rates of 36%, 31% and 28% would drop to 33%, 28% and 25% by then, respectively.

The compromise also would gradually increase the per-child tax credit from $500 to $1,000 by 2010. A key question was whether to make the credit refundable for low-income families--that is, to give cash refunds to families that qualify for the credit but do not make enough money to owe income taxes.

The compromise went along largely with the Senate’s more generous provisions, despite opposition from many conservatives who wanted the bill’s benefits to go only to those who pay income taxes. But the relief for lower-income workers was considered crucial to maintaining the support of moderate Republicans and conservative Democrats crucial to the bill’s passage in the narrowly divided Senate.

Another major provision will phase out the estate tax. There has been strong bipartisan support for reducing or eliminating the tax, which runs as high as 55%. However, it affects relatively few people because it applies only to estates worth more than $675,000--an exemption scheduled to rise to $1 million in 2006.

The compromise bill repeals the estate tax--but not until 2010. In the meantime, the bill calls for gradually reducing the top tax rate to 45% and periodically increasing the exemption to $3.5 million by 2009.

The compromise also provides tax breaks for married couples, responding to bipartisan complaints about the so-called marriage penalty.

That quirk in the tax code causes many couples to pay more in taxes after they marry than they would have if they had remained single.

To provide relief, the bill increases the standard deduction for couples and expands the 15% tax bracket so it applies to more of couples’ incomes. However, the measure disappointed some marriage penalty opponents because the relief does not begin to take effect until 2005.

The bill includes a variety of new tax breaks for education expenses, including a new deduction of up to $5,000 for college tuition expenses--a provision considered key to holding on to the support of several swing Democrats in the Senate.

The measure also will gradually provide new tax incentives for retirement savings by, among other things, increasing from $2,000 to $5,000 the amount people can deposit in tax deferred IRAs--pension provisions that enjoy broad bipartisan support even though they were not included in Bush’s tax proposal.

Among the provisions not in the final bill was a Senate proposal that would have made permanent the tax credit businesses can take for increasing research and development spending. Backers of this tax credit hope to pass it in another bill later this year.

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Times staff writer James Gerstenzang contributed to this story.