Congress OKs $350-Billion Tax Cut Bill

Congress on Friday gave final approval to a sweeping tax cut bill, capping a tumultuous legislative journey that tested President Bush’s leadership, left Congress riven by partisan divisions and produced a measure that will reshape the government’s fiscal picture for years.

The $350-billion tax and spending package falls short of Bush’s initial $725-billion, 11-year plan to stimulate economic growth.

But if, as proponents hope, the bill’s many temporary provisions are eventually made permanent, the bill could end up providing a bigger tax cut than Bush sought -- up to $1 trillion through 2013, by some estimates.

“This is a trillion-dollar tax cut masquerading as $350 billion,” said Sen. Olympia J. Snowe (R-Maine), who voted against the bill.

For Bush, that is a potential silver lining in a bill that in order to pass required him to retreat from a core proposal: eliminating all taxes on dividends. The measure will cut -- not abolish -- those taxes.

The Senate vote on the bill was 50 to 50; Vice President Dick Cheney, making a rare appearance as the chamber’s presiding officer, cast the tiebreaking tally to pass it.

Just a few hours earlier, the House had passed the bill on a largely party-line vote, 231 to 200.

The measure, which provides $320 billion in tax cuts, $20 billion in aid to states and $10 billion in refunds to low-income families with children, is expected to be signed by Bush next week.

It includes cuts in income tax rates, tax relief for families with children and married couples, cuts in taxes on dividends and capital gains, as well as new incentives for businesses to invest.

Its effect for millions of taxpayers will be almost immediate: As soon as the bill becomes law, employers will be instructed by the U.S. Treasury to withhold less from workers’ paychecks to reflect lower tax rates.

The broader impact on the economy is harder to predict. But Bush and his allies are hoping that the tax cuts for investment income will give a quick boost to the stock market.

They also hope the income tax cuts will pump consumer cash into the economy and business breaks will spur job creation.

“This tax relief will help create jobs,” said Senate Finance Committee Chairman Charles E. Grassley (R-Iowa). “And by creating jobs, it’ll make people feel better about the economy. It’s worth every penny.”

Proponents acknowledge that they are hoping the resulting tax cuts eventually will add up to more than $350 billion. That is based on the assumption that lawmakers would feel pressure not to let several of the tax cuts expire in the next few years, as called for by the bill.

For instance, Grassley said he expected Congress to act before the 2004 elections to make permanent the bill’s provisions to increase the per child tax credit and to provide a tax break for married couples.

Both provisions are to expire in order to keep the bill’s price tag down to $350 billion -- the figure needed to get it through the Senate. That caused critics to denounce the legislation as a sham.

“The gimmickry in this bill is enough to make an Enron accountant blush,” said Senate Minority Leader Tom Daschle (D-S.D.).

Friday’s Senate vote was an emblem of how much more partisan the political environment has become since 2001, when Bush’s $1.35-trillion tax cut bill passed with support from 12 Democrats.

This year, only two Democrats -- Ben Nelson of Nebraska and Zell Miller of Georgia -- voted for the bill.

Three Republicans -- Lincoln Chafee of Rhode Island, John McCain of Arizona and Snowe of Maine -- voted against it. Both of California’s Democratic senators, Barbara Boxer and Dianne Feinstein, opposed it.

In the House vote, 224 Republicans and seven Democrats backed the bill; voting against it were 198 Democrats, one Republican and one independent. California’s delegation split exactly along party lines -- all 33 Democrats voted against the bill, and all 20 Republicans were for it.

That partisan environment has prevailed from the start of Bush’s drive for a tax cut, forcing him to try to push the bill through Congress by relying almost exclusively on Republicans.

That turned the debate into a family feud, straining relations at times between the House and Senate, and between Congress and the White House.

Making the challenge even tougher, Bush surprised GOP congressional leaders when, in unveiling the plan in January, he made its cornerstone the elimination of dividend taxes.

House Ways and Means Chairman Bill Thomas (R-Bakersfield) was lukewarm to the idea. He devised an alternative -- a sharp cut, not repeal, of dividend taxes coupled with a capital gains tax cut.

The dividend tax repeal -- which over 11 years would have cost an estimated $396 billion -- was an even harder sell in the Senate, given the refusal of some Republicans to back any bill with a price tag exceeding $350 billion.

Bush’s ability to sell his plan also was hurt by his focus on toppling the Iraqi regime of Saddam Hussein and the resulting war with Iraq in March and April.

Ultimately, the Senate came closer than the House to giving Bush what he wanted. Under pressure from the White House, the chamber last week passed a bill that included a repeal of the dividend tax -- at least temporarily.

That put the House and Senate GOP at odds, with a week to go before the Memorial Day deadline Bush set for passing a final measure. To prod them, the president met with GOP leaders Monday and told them he expected their differences to be resolved by the end of this week.

At that meeting, Bush continued his push for a bill that would include some form of dividend tax repeal. But by the next day, administration officials concluded that it was more important to pass a bill quickly than to insist on any detail. And they concluded that the legislation was more likely to move quickly if they accepted the House’s plan for reducing dividend taxes.

That called for cutting the top rate on dividends and capital gains to 15% -- down from current top rates of 38.5% on dividends and 20% on capital gains.

Tense meetings between Thomas and Grassley ensued. It took personal visits to the Capitol by Cheney to seal the deal.

The final bill still has many Bush fingerprints. It includes his plan to carry out immediately the income tax rate reductions scheduled to take effect in 2004 and 2006.

It also expands tax breaks for small businesses that invest in new equipment.

A side effect is to increase up to $100,000 the tax write-off for the cost of large sport utility vehicles. Environmentalists had sought to close that loophole, saying it amounts to a subsidy for the least fuel-efficient SUVs.