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House, Senate Reach a Deal on Tax Cuts

GOP negotiators back a $350-billion plan to slash dividend and capital gain levies while aiding states. Bush could get the bill this week.

May 22, 2003|Janet Hook | Times Staff Writer

WASHINGTON — House and Senate negotiators on Wednesday agreed to a $350-billion plan to cut taxes and provide aid to financially struggling states, capping months of debate over how much to scale back President Bush's more ambitious plan to spur economic growth.

The bill's costliest and most controversial element is a plan to slash taxes on dividends and capital gains -- a compromise reached after President Bush abandoned his push to eliminate, not just reduce, taxes on dividend income.

But even for taxpayers with no investment income, the measure promises a quick infusion of cash.

Cuts in income-tax rates now scheduled for 2006 would occur immediately, and could be reflected in reduced payroll withholding as early as July 1. Some 25 million low- and middle-income families with children could receive refund checks of up to $400 a child as early as this summer. Married couples would get a larger standard deduction when they file their 2003 tax returns.

The compromise bill is expected to clear the House and Senate and go to the White House for Bush's signature before week's end. Overall, it calls for roughly $315 billion in tax cuts, $20 billion in aid to states and about $15 billion in refunds for low-income families with children.

Of the aid to states, California would get an estimated $2.5 billion of the total.

The tax cuts are less than half the $725 billion Bush proposed in January when he unveiled his plan to help the nation's sluggish economy. But amid congressional concern about the mounting federal deficit -- as well as the war with Iraq -- it quickly became clear that he would have to settle for less.

Wednesday's deal was struck after Vice President Dick Cheney came to the Capitol for an afternoon of hard bargaining -- a kind of shuttle diplomacy among Republican factions warring over the size and details of the tax cut. His active role was a sign of how urgently the administration wanted Congress to finish the bill this week, before lawmakers begin a weeklong Memorial Day recess.

Timing of congressional action on the tax-cut bill is economically and politically important to Bush. The longer it takes to get the money it provides flowing to consumers, businesses and beleaguered state governments, the less likely the economy will have significantly improved as the 2004 election draws near.

Precise estimates of the impact of the whole bill on particular families remained uncertain because of details still in flux. But changes in the tax brackets alone would save a single filer with $65,000 in annual income $741 in federal income tax. The dividend change would save a taxpayer in the 33% bracket $180 for every $1,000 in dividend income earned. Changes to the tax rates for capital gains -- profits from the sale of stocks, real estate and other assets -- would save investors roughly $5 for every $100 in gains.

While most of the tax cuts would take effect retroactively to Jan. 1, 2003, they would not stay on the books for nearly as long as the 11 years Bush proposed. To keep down the bill's total cost, most of its provisions would be only temporary.

Precise expiration dates were still being calculated Wednesday, but the tax cut on investment income would likely last until 2008. Meanwhile, tax credits for families with children, tax relief for married couples and new incentives for businesses to invest and expand would probably last no more than two years. The accelerated income tax rate cuts would expire in 2011.

Critics denounced the temporary nature of many of the tax cuts as illusory, arguing most, if not all, would be extended. They derided the cutoff dates as gimmicks designed to obscure the bill's true long-term drain on the deficit-ridden federal budget.

"We know that the price tag is fake because the backroom negotiators are intent on putting an artificial 'sunset' on the tax cuts, an expiration date that they know is not real but makes it appear as if a tax cut does less damage to our fiscal situation," said Rep. Charles Rangel (D-N.Y.).

Final details were still being worked out overnight, but GOP House and Senate leaders voiced confidence that they could pass the bill as early as today. They also acknowledged that many Republicans are bound to be disappointed that the tax cut is so much less than the original Bush plan.

"Obviously, we're disappointed we couldn't get more," said John Feehery, spokesman for House Speaker J. Dennis Hastert (R-Ill.). "But you've got to look at the big picture. If the Democrats were in control, we'd be raising taxes."

The compromise was crafted to resolve differences between versions of the bill passed recently by the House and Senate. Although both bills had similar provisions on individual income tax breaks, they differed in other important respects.

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