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Senators Endorse a Proposal to Give States $20-Billion Bailout

The deal could help Bush's attempts to cut taxes. California stands to get $2.5 billion for Medicaid and other programs.

May 15, 2003|Janet Hook | Times Staff Writer

WASHINGTON — A bipartisan coalition of senators agreed Wednesday on a plan to allocate aid to financially strapped states as part of legislation to stimulate the economy, a deal that could help President Bush and his allies move the bill's tax cut provisions closer to what the White House wants.

The $20-billion state aid initiative -- expected to be added today to the $350-billion, 11-year tax cut bill the Senate is debating -- would provide an estimated $2.5 billion for cash-strapped California for Medicaid and other social service programs.

Several senators had said they could not support the entire bill without some aid to states. Among them was Sen. Ben Nelson of Nebraska, one of the few Democrats who has been sympathetic to Bush's call for a bigger tax cut than the Senate bill provides.

"It certainly improves the bill," Nelson said of the state aid. "It increases the likelihood that I'll be there" voting for it.

Meanwhile, Republicans said they were close to having enough support to pass an amendment that would be more in line with Bush's high-priority initiative to eliminate taxes on dividends.

"I intend to bring up an amendment to enhance the dividend proposal," said Sen. Don Nickles (R-Okla.). "I expect to win."

Nelson indicated he would be willing to support the new dividend tax proposal, which would cut the tax this year and eliminate it for three years, 2004 to 2006. GOP aides said Nelson's support could be enough to pass the proposal when it comes to a vote today.

Nickles' proposal would fall short of Bush's call for eliminating the dividend tax through 2013. But it would go further than the bill now before the Senate, which would exempt only a small portion of dividend income from taxation.

The Senate was expected to finish work on the tax cut bill by the end of the week. Senate leaders then will commence negotiations with the House, which last week passed a tax cut bill totaling $550 billion. The House measure includes a provision that would cut -- but not eliminate -- the tax on dividends.

The Senate bill includes $442 billion in tax cuts and other economic stimulus measures. It also includes $92 billion in spending cuts and targeted tax increases to bring the bill's price tag down to $350 billion.

During debate on the measure Wednesday, Democrats offered amendments to expand tax credits for families with children, extend unemployment benefits that are due to expire at the end of this month and to make permanent the tax credit for research and development expenditures. The Senate was expected to vote on those and a slew of other amendments today.

One of the most contentious amendments was to be offered by Sen. John B. Breaux (D-La.); it would kill a provision that would eliminate a benefit for U.S. workers abroad that allows them to exclude up to $80,000 of their annual income from taxes. To make up for the $35 billion in revenue that would be lost by dropping that tax hike, Breaux proposes to scale back the proposed $81-billion tax break for dividend income.

Breaux had wanted to have a vote on the amendment Wednesday, but that and other votes were postponed until today because two Democratic senators running for president -- John Edwards of North Carolina and John F. Kerry of Massachusetts -- were out of town campaigning.

Nickles said his amendment to expand the dividend tax break would allow taxpayers to exclude from taxation 50% of their dividend income in 2003 and all their dividend income the next three years. The provision would die in 2007 unless Congress acted to extend it. But Nickles and others hope that Congress would not allow the provision to die.

A senior GOP aide said Nickles' amendment would increase the dividend tax break to about $125 billion from the current $81 billion. That additional cost would be offset by scaling back the bill's tax breaks for small businesses and married couples.

Sen. Olympia J. Snowe (R-Maine) is among those opposed to the amendment, viewing its limited duration as a political gimmick.

Another Republican, George Voinovich of Ohio, was said to have some reservations about the amendment. He could not be reached for comment, but GOP leaders hoped to win his support. With backing from him and Nelson, GOP headcounters said they would have the 50 votes they need to pass the amendment, because Vice President Dick Cheney would cast the tie-breaking vote.

Nelson has always been more sympathetic than most Democrats to a broader dividend tax cut. But he has made it plain that part of the price of his support is aid to the states -- an element not included in Bush's economic growth initiative or the House bill. Many Republicans oppose such aid, arguing that states have created some of their own budget problems with unrestrained spending.

But many senators of both parties have argued the aid was needed to help states that are running deficits because of forces beyond their control -- such as the economic downturn and new federal requirements on education and homeland security.

The Senate bill, as approved by the chamber's Finance Committee last week, included $20 billion for state aid, but postponed crucial decisions about how that money would be allocated. That was decided in the deal announced Wednesday by a small group of centrist Republicans and Democrats.

The amendment specifies that $10 billion would go to increasing the federal share of Medicaid, a federal-state program. The remaining money would have fewer strings attached, with 60% going to states and 40% for local governments to use for such social services as education, health care, transportation and public safety.

An aide to Sen. Susan Collins (R-Maine), a lead sponsor of the amendment, said the $2.5 billion for California would include $1.29 billion for Medicaid, $691 million in other state aid and $461 million for localities.

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