Senate Panel Refuses to Extend a Bush Tax Cut

Senate tax writers dropped an effort Tuesday to extend one of the tax cuts President Bush strongly supports, underscoring a growing rift in the Republican-controlled Congress over spending and tax cuts.

The Senate Finance Committee left out of a $60-billion tax-cut measure an extension of a dividend and capital gains tax cut due to expire at the end of 2008.

The action sets up a likely showdown with the House. GOP leaders there support extending the lower tax rate for income from investment profits, approved as part of Bush’s 2003 tax cuts.

It was the latest dispute within the Republican ranks, as lawmakers, looking to their reelection campaigns, break from the president as his poll ratings slide. In the House, a budget-cutting bill has been hung up by an internal GOP fight.

The tax bill could reach the Senate floor as early as today. An effort is expected to be made to rescind tax breaks available to large oil companies -- a response to the public furor over the record oil industry profits when gasoline prices are high. But many Republicans object that rescinding energy tax breaks would discourage new energy production.

The committee approved a package that would extend several expiring tax cuts, including a research tax credit. It would provide new tax cuts to encourage business investment in the hurricane-battered Gulf Coast.

Sen. Olympia J. Snowe, a moderate Republican from Maine, infuriated her conservative colleagues by supporting Democrats’ objections to extending the dividend and capital gains tax cut when the government faces budget deficits and massive costs for the war in Iraq and post-Katrina reconstruction. A one-year extension would cost about $10 billion.

“It’s not a question of whether or not we support tax cuts,” Snowe said. “It really is a question of what we can afford to do now ....”

Democrats said the tax cuts would disproportionately benefit upper-income taxpayers while Congress considers cutting spending for programs that serve the poor. Most Republicans have portrayed the tax cuts as critical to promoting economic growth.

A number of conservative senators vowed to fight to include the dividend and capital gains tax-cut extension in whatever bill emerges from a compromise with the House. They warned that otherwise, taxpayers would face a tax increase.

“This is just the first step,” said Sen. Michael D. Crapo (R-Idaho).

Meanwhile, the House Ways and Means Committee met into the night on tax-cut legislation that differed in important respects from the bill that cleared the Senate committee.

The House bill would cost $32 billion over the next five years -- roughly half that of the Senate measure. It would extend through 2010 the tax cuts for dividend income and capital gain, costing the treasury $21 billion.

The House bill would not offer mostly upper-income taxpayers any relief from the alternative minimum tax, a 1969 provision of the tax code designed to prevent very wealthy taxpayers from shielding most of their income from the IRS. The Senate bill includes one more year of relief. Inflation-driven wage gains have driven more and more of the middle class into the grasp of the alternative minimum.

Greg Valliere, chief strategist for Stanford Washington Research Group, said he had been confident a few months ago that the dividend and capital gains tax cut would be extended before it expired at the end of 2008. Now, he said, even a one-year extension was “iffy because the Republicans are so dysfunctional right now.”

The Securities Industry Assn. said in a statement that since Congress approved the 15% tax rate on dividends and capital gains, “more companies are offering larger dividends and stock market values have increased.”

If Congress does not act, the group said, the top individual tax rate on long-term capital gains would increase to 20%, while the top tax rate in dividends would jump to 35%.

The Senate tax bill includes an accounting change that would cost major oil companies about $5 billion over the next five years.