Congress Takes On Controversial Tax, Spending Policy

Nearly halfway into its 2006 term, Congress is beginning -- with mixed success -- to get down to the sometimes unpalatable and always controversial details of tax and spending policy.

For the moment, tax policy is on track: The House passed a Republican-sponsored bill Wednesday that, by extending some tax breaks and inaugurating others, would cost the Treasury about $70 billion over the next five years. The vote was a largely party-line 244 to 185.

The Senate is scheduled to vote today, and even the bill’s opponents predict it will pass on a close vote.

Just offstage, the House moved closer to adopting a budget for 2007 that would set guidelines for spending legislation that Congress would pass later this year. Limiting spending is proving more difficult than cutting taxes, however, and the road to final budget agreement between the House and Senate is laden with obstacles.

But tax policy is in the spotlight this week.

The bill passed by the House on Wednesday would prevent the alternative minimum tax -- at least for the current year -- from adding to the burden of upper-middle-income taxpayers. Because it is not indexed to inflation, the tax, created to stop the wealthiest taxpayers from sheltering their incomes, has increasingly ensnared individuals making $75,000 to $100,000 a year.

The bill’s most controversial provision would extend, through 2010, the low tax rates that Congress placed through 2008 on income from dividends and profits from the sale of investments.

Rep. Bill Thomas (R-Bakersfield), chairman of the House Ways and Means Committee, said that if Congress did not extend these tax rates, it would effectively penalize those whose investments had made possible the robust economy of the last three years.

“There is a direct correlation between the passage of the [investment] tax relief and the exceptional economic growth we are currently experiencing,” he said.

But Rep. Pete Stark (D-Fremont), saying that only the rich would profit significantly from tax breaks for investment income, called this “voodoo economics.”

Rep. Sander M. Levin (D-Mich.) added: “There’s caviar for the very wealthy and mostly crumbs for everyone else.”

Leonard E. Burman, co-director of the Tax Policy Center, a nonpartisan Washington research group, said he had studied tax rates on investment income over the decades and found no relationship to economic growth.

Rather, he said, low tax rates on capital gains -- the profits from investments -- were “the linchpin behind every sort of tax shelter you can imagine.”

President Bush commended the House for passing the bill and called on the Senate to follow suit.

“By extending key capital gains and dividends tax relief, the House has taken an important step to continue to help hard-working Americans and to keep our economy strong and growing,” Bush said in a statement.

The California delegation voted along party lines: All Republicans favored the bill and all Democrats -- except Rep. Dennis Cardoza of Atwater, who did not vote -- opposed.

In 2010, the bill would eliminate the $100,000 income limit for converting ordinary individual retirement accounts into Roth IRAs, which accumulate earnings tax-free.

Contributions to ordinary IRAs are tax-deductible, but withdrawals are taxed. For Roth IRAs, it’s the reverse: Contributions come from after-tax income, but withdrawals -- including investment profits -- are not taxed.

The conversion to Roth IRAs would yield the government an initial windfall as savers paid taxes on the savings they converted. But ultimately, savers would enjoy an even greater bonanza as they withdraw funds from their Roth IRAs without paying taxes.

On the spending side of the ledger, though, Congress has been moving more tentatively. House Republican leaders were planning to move a 2007 budget to the floor once they thought they had enough votes to pass it. Late Wednesday, they still had no plans to move a budget to the floor.

The dilemma the Republicans face is a common one: They knew they could rely on 100% opposition from the Democrats, which meant they could afford to lose only 14 of their 231 members to guarantee a majority of the 433 House members. But adjusting the budget to attract additional conservatives risks losing moderates; likewise, making the budget more moderate threatens its conservative support.

House Budget Committee leaders secured the support of the Republican Study Committee, which comprises about 100 conservatives, for its version of the budget -- under certain conditions.

The conservatives wanted guarantees that bills authorizing a presidential line-item veto and establishing a commission to abolish outdated government agencies would be placed on the House calendar for votes.

And they insisted that “emergency” appropriations bills undergo scrutiny by the Budget Committee before going to the full House for floor votes.

But the Budget Committee’s head count showed it was still a few votes short of a majority in the full House for the budget the committee approved in March.

It was considering a plan to transfer several billion dollars from defense and domestic security programs, which would still get large spending increases over this year, to social programs, which on the whole were frozen in place by the committee-approved budget.

Such a ploy worked in the Senate, which passed its version of the 2007 budget in March. But in the House, it risked the support of more conservatives than it would gain among moderates.

House rules say that starting Monday, the Appropriations Committee can approve annual 2007 spending bills without the strictures of a congressional budget. It would be the first time since the 1974 law establishing Congress’ budget process that the House failed to meet this deadline.