Senate Panel Does Not Extend Tax-Rate Cut

Facing a stalemate over one of President Bush's top economic policy goals, the Senate Finance Committee yesterday gave up efforts to extend deep cuts to the tax rate on dividends and capital gains and approved a $60 billion tax measure largely devoted to hurricane relief and tax cuts with bipartisan appeal.

The measure, which could pass the Senate today, marks the latest in a string of legislative setbacks for Bush, who has repeatedly called on Congress to make his first-term tax cuts permanent and has taken particular pride in the 2003 dividends and capital gains tax cuts, which are set to expire in 2008.

The Senate measure diverges sharply from a Ways and Means Committee tax package moving toward a House vote as early as Friday. The House package, which cuts taxes by $70 billion over five years, would extend the dividends and capital gains tax cuts through 2010. It would not extend a measure to mitigate the impact of the alternative minimum tax, which is increasingly snaring the middle class.

Ways and Means Chairman Bill Thomas (R-Calif.) would like to use the political pressure of a rising AMT burden to drive a broad tax-code overhaul.

The House and Senate are struggling to complete tax cuts called for in the congressional budget resolution, which would accompany budget-cutting measures. In both chambers, the tax packages cut revenue more than the budget packages slice spending. Democrats and some moderate Republicans question the wisdom of expanding the deficit over the next five years.

The Senate measure -- drafted by Finance Chairman Charles E. Grassley (R-Iowa) -- won plaudits yesterday from moderate Democrats and Republicans, who called it a modest, consensus approach that reflects the tough budget choices needed in the face of rising war costs, back-to-back hurricanes, the unprecedented cost of rebuilding the Gulf Coast and soaring energy costs.

"The fact is, these are a confluence of challenges that require a confluence of choices," said Sen. Olympia J. Snowe (R-Maine), who forced Republican leaders to back down on the dividends and capital gains extensions when she argued such cuts would primarily benefit the wealthy as Congress was moving to cut programs for the poor.

Democratic Sens. Max Baucus (Mont.), Charles E. Schumer (N.Y.) and Blanche L. Lincoln (Ark.) joined Republicans to pass the bill out of the committee, 14 to 6.

Conservative Republicans had held up Finance Committee action for nearly a week to pressure Snowe, and they lamented the panel's failure to extend tax cuts that they say have resulted in a windfall of corporate tax payments.

Senate GOP leaders hope dividend and capital gains tax cuts will be included in the final tax bill that emerges from House and Senate negotiations, but House Republicans have their own problems. House Republican moderates who have stymied passage of a $54 billion budget cutting measure have also been outspoken about what they see as a tax cut weighted to the wealthy.

The Senate bill includes tax breaks for the hurricane-battered Gulf Coast worth $7 billion over five years. Many of those measures were first proposed by the president.