Senate Passes Budget With $350-Billion Tax Cut

Times Staff Writer

The Senate on Wednesday passed a budget that calls for a tax cut less than half the size of the $725-billion, 11-year economic stimulus plan sought by President Bush, thwarting Republican efforts to keep his domestic agenda moving smartly through Congress even as war rages abroad.

The 56-44 vote approving the budget came after the Senate defeated Republican measures to restore some of the tax cut that had been lopped to $350 billion Tuesday by a coalition of Democrats and moderate Republicans.

"The growth package is not what I want," said Senate Budget Committee Chairman Don Nickles (R-Okla.). "I think it's about half a loaf. That's better than none."

In the end, Nickles and 49 other Republicans joined with six Democrats to pass the budget. One Republican, John McCain of Arizona, joined 42 Democrats -- including California's Dianne Feinstein and Barbara Boxer -- and one independent in voting against the resolution.

The White House is counting on regaining lost ground in negotiations between the Senate and House, which has passed a budget that would make room for Bush's $725-billion tax cut.

"It is unfortunate that the full Senate has failed to pass a budget that provides for my entire economic growth and job creation plan," Bush said Wednesday. "We will work to ensure that the final House-Senate budget provides the growth measures American workers deserve."

Some analysts said pressure on Congress to control the size of the tax cut may mount, out of concern over the growing federal budget deficit and the cost of the war in Iraq.

"All the momentum at this point is to make the tax cut smaller, not larger," said Stanley Collender, a budget expert at the Fleischman-Hilliard public relations firm. "There seems to be genuine concern about the deficit, and people are focusing more on the cost of the war than the value of the tax cut."

Also, Bush's claim that his plan would significantly bolster the economy was challenged Tuesday when the Congressional Budget Office reported that such an impact was "not obvious."

"Taken altogether, the proposals would provide a relatively small impetus in an economy the size of the United States," the report said. It was delivered by CBO Director Douglas Holtz-Eakin, a Republican appointee who had been expected to be more friendly to administration policies.

Wednesday's Senate vote has caused GOP leaders to rethink their timing and strategy for handling Bush's economic priority. The House has been expected to act on legislation specifying the details of the tax cut next week, but Republican aides say the bill will not be written until after a final budget compromise is struck.

"We're in limbo," said Christin Tinsworth, spokeswoman for the House Ways and Means Committee.

The Senate vote on the budget, a blueprint for tax and spending bills that will be considered later in the year, was a surprise setback for the president. It reflected, in part, how hard it is for the GOP to sell a complex, controversial domestic policy without more active engagement by Bush, who has been preoccupied by the war.

"It is a major domestic proposal that is properly overshadowed by concern about the war," said Sen. Lindsey O. Graham (R-S.C.). "There will come a day when the president will focus his attention on the economic stimulus proposal, and that's when we will have our most leverage."

The budget vote also was a rare victory for Democrats, who are in the politically awkward position of trying to support Bush as commander in chief while fighting him on the tax cut and other domestic issues.

"We have profound differences with the administration on the domestic agenda," said Senate Minority Leader Tom Daschle (D-S.D.).

Still, even the stripped-down tax cut was a measure of the sharp limits on Democrats' influence. A $350-billion reduction would be far larger than most of them want and would set the federal budget on course for huge deficits for years to come.

"It is a little mind-boggling that we are celebrating as a return to rationality a decision to reduce taxes by ... $350 billion when we face [annual] deficits as far as the eye can see of over $300 billion," said Robert D. Reischauer, head of the Urban Institute, a Washington research organization, and former director of the Congressional Budget Office. "It shows that to a significant degree the president has defined the field upon which the budget battle will take place."

Senate debate on the budget resolution sprawled over a week and a half of wrangling on 80 amendments. Although the resolution is nonbinding, it is an important benchmark that essentially sets a ceiling on spending and tax cuts for the year.

The resolution also has crucial provisions that establish fast-track legislative procedures for tax cuts. It effectively prevents a Senate filibuster of tax legislation to implement the budget targets. Lawmakers in both parties assume that only tax cuts protected by the procedures -- $725 billion under the House budget and $350 billion in the Senate -- will be enacted this year.

Where that tax cut target is set in the final resolution is central to the fate of Bush's program. A $350-billion ceiling would kill the plan's most controversial element: the elimination of taxes on dividend income, which would cost $396 billion over 11 years.

Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) already is floating an alternative that would provide for only half of taxpayers' dividend income to be exempt from taxation. Grassley said he would probably be unwilling to settle for a smaller cut.

"Unless he can get at least a 50% exclusion, he's not sure it's worth doing at all," said Jill Kozeny, Grassley's spokeswoman.

That points to one of the two basic strategic questions facing House and Senate budget negotiators: How big does the tax cut need to be to have a substantial impact on the economy? And how small does it have to be to pass the Senate?

Some Republicans say the Senate's tax cut would do too little to jump-start the economy.

But if budget negotiators set the tax cut much beyond $350 billion, they risk losing key supporters on the detailed spending and tax cut bills. These include Sens. George Voinovich of Ohio and Olympia J. Snowe of Maine, the two Republicans who co-sponsored the amendment to set the tax cut at $350 billion.

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