Partisan Battle Trips Up Popular Tax Benefits

Just about every lawmaker in Congress favors extending a batch of popular tax benefits approved during President Bush’s first years in office and authorized through 2005.

But in a case study of the tortuous process that can surround even the most highly regarded proposal on Capitol Hill, extension of the tax benefits appears to face an uphill road as Congress nears adjournment.

The benefits, claimed by more than 10 million taxpayers last year, give those who live in states without income taxes a deduction for their state sales taxes. They allow a deduction for some college tuition. Teachers may deduct the costs of buying supplies for their classrooms. And a research and development tax credit -- hugely popular in the business community -- is also part of the package.

But so far, these and 43 other tax benefits have become ensnared in a partisan battle over a minimum-wage increase, which Democrats and some moderate Republicans want, and a sharp reduction in the estate tax, dear to the hearts of conservative Republicans.

In July, Republicans thought they had scored a strategic coup when they stitched the minimum-wage increase and the estate tax cuts into a single bill that, they hoped, offered something for everybody to love. The trouble was, there was also something for almost everybody to hate.

So to sweeten the pie -- and appeal to lawmakers of both parties -- Republicans added an extension of the expiring tax breaks.

The maneuver was to no avail; the bill containing these disparate elements was derailed. And two months later, the tax benefits are still hanging as wrangling over the other issues continues.

Some lawmakers, including at least one powerful Republican, are pushing for Congress to break the deadlock.

“Taxpayers could miss out on valuable benefits through no fault of theirs,” Sen. Charles E. Grassley (R-Iowa), chairman of the tax-writing Finance Committee, said last week. “I urge the House and Senate leadership, both Republican and Democrat, to take this problem seriously.”

Grassley warned that time is of the essence, saying that Internal Revenue Service officials have told him Congress must approve the benefits extensions by Oct. 15 if the changes are to be included in 2006 tax forms. That means Congress, which plans to adjourn at the end of this month to campaign for the November elections, has only two weeks to act.

Sen. Max Baucus of Montana, the top Democrat on Grassley’s committee, recently accused other lawmakers of “ineptitude” for not having acted sooner on the tax benefits.

Baucus also decried the continuing GOP reluctance to allow a separate vote on the extension effort, noting that Sen. Judd Gregg (R-N.H.) was quoted in the Wall Street Journal characterizing the tax benefits as “hostage” to the estate tax dispute.

Baucus responded: “It is time we end these threats and get back to the business of legislating.”

But when Baucus tried to bring to a vote a bill focused only on the extension of the tax benefits, Senate Majority Leader Bill Frist (R-Tenn.) blocked him.

Frist said he wanted to preserve the option of a second chance for the full Senate to vote on the estate tax cut, the minimum-wage increase and extension of the tax benefits as a package.

The most expensive benefit is the tax credit businesses can claim for research and development conducted in the United States. A two-year extension would cost $16.5 billion.

The most widely used benefit -- claimed on more than 8 million tax forms last year -- is the deduction for state sales tax payments in places with no state income taxes. The cost of extending this provision for two years: $5.5 billion.

Nearly 2.7 million teachers who paid for classroom supplies out of their own pockets took a maximum deduction of $250 last year. Extending this provision would cost less than $400 million in 2006 and 2007.

Altogether, extending the miscellaneous tax benefits, most of them for two years, would cost $38 billion.

joel.havemann@latimes.com