House OKs $550-Billion Tax Cut Bill

The House on Friday approved a bill to cut taxes for individuals and businesses by $550 billion over 11 years, a milestone for President Bush’s drive to resuscitate an ailing economy that has lost more than half a million jobs in the last three months.

The bill, approved on a largely party-line vote of 222 to 203, would provide the third tax cut in as many years of the Bush administration. It calls for an immediate cut in income tax rates, additional relief for married couples and families with children, a big reduction in taxes on dividends and capital gains, and incentives for businesses to invest and expand.

“People are hurting, unemployment is on the rise, anxiety runs high, investment is chilled, the stock market is stagnant,” House Majority Leader Tom DeLay (R-Texas) said in urging support for the bill. “This will not stand.”

But the bill puts the House at odds with the Senate, even though both are controlled by Republicans. The Senate Finance Committee on Thursday approved legislation that would cut taxes less and departs further than the House measure from the president’s core goal of eliminating taxes on dividends.

The Senate bill also includes aid to financially struggling states, which is opposed by many House Republicans. And the Senate measure is laced with provisions that would close corporate tax shelters and other loopholes -- tax increases that were included to help keep the overall cost of the bill within the Senate’s stricter budget limit of $350 billion. Those provisions have sparked opposition from business lobbyists and were denounced by House Republicans as counterproductive to the push to cut taxes.

“We’re not happy about these provisions,” said Rep. Mark Foley (R-Fla.). “They will not be adopted by the House of Representatives.”

The House-Senate differences amount to a family feud among Republicans and portend a rocky road to final enactment of a tax cut bill that GOP leaders hope to get on Bush’s desk by Memorial Day.

The timing of the legislation is economically and politically crucial. Republicans worry that the longer it takes to get tax relief flowing to businesses and consumers, the less likely it is that the economy will turn around before the 2004 elections.

The sense of urgency about helping the economy has intensified following recent reports of persistent job losses; for April, the unemployment rate jumped to 6%. Against that backdrop, Bush and his GOP allies have put new emphasis on selling tax cuts as an engine of job creation.

In the absence of such a message, said GOP pollster David Winston, voters’ concern about the growing federal budget deficit threatens to undercut support for the president’s plan. Although the government was awash in surpluses two years ago, the budget is expected to run a deficit of more than $300 billion this year -- and remain in the red for years to come. Faced with that outlook, Bush’s critics argue his tax cuts are an unaffordable drain on revenues.

“The key here is the context by which people are looking at the tax cuts,” Winston said. “Democrats want to frame it in the context of the deficit. Republicans want to frame it in the context of jobs.”

House Democrats drafted a more narrowly targeted tax cut bill that would have cost about $124 billion in 2003 and 2004. It would have increased the per-child tax credit, provided tax breaks for small business, extended unemployment benefits, and provided aid to financially strapped states.

Republicans refused to allow Democrats to even offer the alternative. They said, based on procedure, that it did not belong in a tax cut debate because it included a major spending provision. Democrats said they believed Republicans did not want to go on record voting against extending unemployment insurance.

In the vote on the GOP bill, only three Republicans voted against it and only four Democrats for it. The California delegation split along party lines.

The bill includes the major elements of Bush’s economic growth initiative, which centers on accelerating provisions of the 2001 tax cut law that were to be phased in over a decade. Still, its passage was not a complete win for Bush. Even the usually loyal House rebuffed his most innovative proposal -- elimination of the tax on dividend income.

A White House statement on the House bill called it “a strong and positive step forward that will help the economy,” but said the administration would continue to push for improvements.

Bush has argued that the dividend proposal would help the economy grow by giving a boost to the stock market. He also argued it was a matter of fairness to eliminate what he called the “double taxation” of dividends -- that profits are often taxed twice, first by the corporation and then by shareholders when they receive dividends.

The idea -- which would cost $396 billion over 11 years -- got a lukewarm reception from some Republicans, including Ways and Means Chairman Bill Thomas (R-Bakersfield). It had to be revised after the congressional budget resolution called for a smaller overall tax cut than Bush proposed -- $550 billion in the House and $350 billion in the Senate.

Despite heavy pressure from the White House to salvage the elimination of dividend taxes, House Republicans supported a bill that would cut, but not eliminate, the tax on dividends. It also would simplify taxes on investment income.

Dividends are taxed as ordinary income, with a top rate of 38.6%. Taxes on capital gains -- proceeds from the sale of real estate and other assets -- are 20% for most taxpayers and 10% for lower-income people. Under the House bill, taxes on dividends and capital gains would be 15% for most people and 5% for lower-income people.

The dividend tax cut faces even tougher sledding in the Senate, where the pending bill would provide much more limited relief. It would exempt only the first $500 of dividend income, plus a portion of income above that level.

One of the most immediate effects of the House bill would be to accelerate the income tax rate cuts scheduled to take effect in 2004 and 2006. The house bill would make them retroactive to Jan. 1, 2003; current rates of 27%, 30%, 35% and 38.6% would drop to 25%, 28%, 33% and 35%.

Other provisions were enacted only until the end of 2005. These would:

* Increase the tax credit families can take for each child from $600 to $1,000 in 2003, 2004 and 2005.

* Ease the tax burden on married couples from 2003-05 by increasing the standard deduction for joint filers and allow more of their income to be taxed at the 15% rate rather than a higher rate.

* Increase the amount of money that is taxed at 10%, the lowest tax bracket, from 2003 to 2005.

The 2005 cutoff was designed to keep the bill’s cost within the $550-billion cap the House adopted. The bill’s sponsors say they expect Congress would extend those provisions before the cutoff takes effect. That device helped make room for tax breaks for investment income and provisions benefiting businesses. These would:

* Increase from $25,000 to $100,000 the amount of expenses small businesses can write off their taxes, and expand the number of enterprises that qualify as small businesses.

* Extend and expand a temporary provision that allows larger businesses to write off 30% of investments in the first year. The bill would increase that write-off to 50%.