Senate Fiscal Plan Adds Aid to Cities and States

The Senate Finance Committee, responding to a growing clamor for federal help for fiscally strapped cities and states, approved an economic growth package Thursday that included $20 billion specifically for local governments.

The money, included in a $350-billion measure that would cut taxes in an attempt to stimulate the economy, was aimed at addressing the needs of state and local government officials who have slashed health, education and other services to deal with their worst fiscal crisis in decades.

No such aid was proposed by President Bush as part of his original $725-billion, 11-year economic growth initiative. But it was included in the Senate bill at the insistence of several key senators as the price of their support for the entire package.

The bill, approved 12 to 9 on a largely party-line vote, also broke with Bush’s plan by not including what the president has touted as the cornerstone of his economic policy -- the elimination of taxes on dividend income. Instead, the bill contains a much less sweeping provision; it would allow taxpayers to exclude at least $500 of their dividend income from taxation, with that figure to rise slightly through 2014.

Joining the committee’s 11 Republicans in voting for the bill was one Democrat -- Sen. Blanche Lambert Lincoln of Arkansas. Lincoln, whose state was visited by Bush on Monday as part of the administration’s effort to drum up support for tax cuts, supported the bill after the committee’s chairman, Sen. Charles E. Grassley (R-Iowa), agreed to include provisions affecting homeowners and lower-income families with children.

Although the bill would cut taxes and raise spending by about $421 billion, it also includes about $71 billion in so-called offsets -- tax hikes and spending cuts in other areas. That brings the bill’s net cost to $350 billion, the target the Senate set in a budget resolution passed last month.

The proposed tax hikes include a provision that would reduce tax breaks for U.S. citizens working abroad and crack down on tax shelters that were used by Enron Corp., the Texas-based energy company that declared bankruptcy in late 2001. Its financial collapse spotlighted the issue of corporate corruption.

Many Republicans on the Senate Finance Committee said they were disappointed the bill did not include a deeper cut in taxes on dividends.

“This may be an improvement over present law, but not much,” said Sen. Don Nickles (R-Okla.). He and others said they would try to expand the dividend tax break when the bill goes to the Senate floor next week -- or in conference with the House, which is expected today to pass its version of a tax cut measure.

The House bill would cut taxes by $550 billion, including sharp reductions in taxes on dividends and capital gains.

At the White House, officials are hoping to increase the Senate’s limited tax break for dividends.

“The action taken in the Finance Committee on dividends ... is insufficient, but it is progress,” White House spokesman Ari Fleischer said.

Under the Senate bill, shareholders would pay no taxes on their first $500 of dividend income each year beginning in 2004. Taxpayers who earn more in dividends would get an additional percentage tax free -- 10% of the amount over $500 from 2004 to 2007, rising to 20% in 2008 to 2012.

The Senate bill includes all the other major components of Bush’s tax plan. It would, like the House bill, speed up to 2003 scheduled reductions in income tax rates. Under the tax cut law enacted in 2001, those rate cuts are not supposed to take full effect until 2006.

The Senate bill also would increase the tax credit families get for each child to $1,000 from the current $600, expand the lowest income tax bracket and speed up scheduled tax relief for married couples. And it provides increased tax breaks for small businesses.

The tax increases were geared mostly to curbing corporate tax loopholes. But the biggest tax hike would hit individuals -- U.S. citizens who work and pay taxes abroad -- by repealing a provision that allows them to exclude up to $80,000 in income from U.S. taxes. That would take effect in 2005 and raise an estimated $32 billion over nine years.

The tax hikes were needed, in part, to help pay for the state aid. The Bush administration has argued that such assistance is not needed because the states’ fiscal situation will eventually improve when the economy turns around.

But California -- and most other states -- are struggling to bring their budgets into balance. Gov. Gray Davis and the Legislature have been trying to cope with a record shortfall -- estimated to be as large as $35 billion over the next 14 months -- by adopting measures that include spending cuts in education and health care.

An infusion of federal aid “couldn’t come at a better time,” said Steve Maviglio, Davis’ press secretary. “We’ve been picking up an extraordinary burden of federal costs from homeland security to health care. We could use all the help we could get.”

The amount California would receive under the Senate bill is unknown because, as approved by the finance panel, the aid program was deliberately sketchy. Grassley said the details would be provided in amendments added to the bill during debate by the full Senate.

Proponents of the state aid view it as an essential component of improving the economy, arguing that the positive effects of federal tax cuts could be undercut if states raise their taxes to cope with budget deficits.

“Anything we do at the federal level will be negated if we do not take the pressure off the states,” said Sen. John D. “Jay” Rockefeller IV (D-W.Va.).

Although key committee Republicans -- Olympia J. Snowe of Maine and Gordon Smith of Oregon -- agreed, more conservative Republicans are opposed to the aid program. They argue that states are in fiscal trouble in part because of profligate spending in recent years that should now be reined in.

“I think they are laughing up their sleeves, the governors and state legislatures: ‘Don’t worry, the feds are going to write us a check,’ ” said Sen. Trent Lott (R-Miss.). “I think we’re being taken for dupes here.”

The House’s tax cut bill contains no provision for state aid. But House GOP leaders may have to accept it as a compromise in negotiations over the bill’s final version, or risk losing crucial votes in the Senate.

Said Grassley, “I don’t see how you get the tax package passed ... without some money for state aid.”

The House version of the bill has drawn unexpected, eleventh-hour criticism from a segment of the business lobby.

In a little-noticed provision, the tax breaks on dividends and capital gains would apply only to shareholders in domestic companies.

Lobbyists for foreign-owned companies are pushing for that to change because it means their investors would not benefit from the lower rates.

The Senate version of the bill would provide its dividend tax break for investors in both domestic and foreign companies.

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Three ways to cut your taxes

The House Ways and Means Committee and Senate Finance Committee each drafted versions of President Bush’s economic stimulus plan. Here’s how they compare:

Major features of the three tax plans

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Child credit

Bush: Increase per-child credit from $600 to $1,000. 2003 cost: $13.7 billion. 10-year cost: $89.6 billion

House: Same as Bush, but credit amount reverts in 2005. 2003 cost: $13.7 billion. 10-year cost: $45 billion

Senate: Same as Bush. 2003 cost: $13.7 billion. 10-year cost: $89.6 billion

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Marriage penalty relief

Bush: Increase personal deduction for two-income families.

2003 cost: $4.9 billion. 10-year cost: $51.4 billion

House: Same as Bush, but relief ends in 2005. 2003 cost: $4.9 billion. 10-year cost: $43 billion

Senate: Same as Bush. 2003 cost: $4.9 billion. 10-year cost: $51.4 billion

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Individual tax cuts

Bush: Advance rate cuts from 2006 to 2004:

- 38.6% tax bracket cut to 35%

- 35% bracket to 33%

- 30% bracket to 28%

- 27% bracket to 25%

- Expand the 10% bracket

2003 cost: $11 billion. 10-year cost: $118.7 billion

House: Same as Bush. House would raise the upper income limit of 10% bracket from $12,000 to $14,000 until 2005. 2003 cost: $11 billion. 10-year cost: $93 billion

Senate: Same as Bush plan. 2003 cost: $11 billion. 10-year cost: $118.7 billion

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Dividend income

Bush: End tax on dividend income. 2003 cost: $7.6 billion. Total cost: $725 billion

House: Reduce tax rate on dividend income and capital gains tax to 15%. 2003 cost: $6 billion. 10-year cost: $295 billion

Senate: End taxation on first $500 in dividend income plus 10% of dividend income above $500 in 2004-2007. The tax-free portion above $500 would rise to 20% in 2008-2012. 2004 cost: $2 billion. 10-year cost: $80.5 billion

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Business taxes

Bush: Increase from $25,000 to $75,000 the allowable expense for business investment. 2003 cost: $1.4 billion. 10-year cost: $28.8 billion

House: Similar to the Bush plan but expires after 2005. 2003 cost: $1 billion.

Senate: Same as Bush, but plan expires in 2012. 2003 cost: $1.4 billion. 10-year cost: $23.4 billion

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Total cost

Bush: $726 billion

House: $550 billion

Senate: $415.3 billion (including tentative $90.7 billion for dividend income exclusion)

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Sources: Joint Taxation Committee, Newsday