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House Passes 3 Tax Cuts, Plans a 4th
Cost Would Outstrip Recent Action on Deficit

By Jonathan Weisman
Washington Post Staff Writer
Thursday, December 8, 2005

The House passed three separate tax cuts yesterday and plans to approve a fourth today, trimming the federal revenue by $94.5 billion over five years -- nearly double the budget savings that Republicans muscled through the House last month.

GOP leaders portray the tax bills -- for the hurricane-ravaged Gulf Coast, affluent investors, U.S. troops serving in Iraq and taxpayers who otherwise would be hit by the alternative minimum tax -- as vital to keeping the economy rolling.

"Our economic policies have done the trick," said Rep. Deborah Pryce (R-Ohio). "We are in the middle of one of the strongest economies this country has ever seen."

But some budget analysts say the flourish of tax cutting badly undermines the recent shows of fiscal discipline. Last month's budget-cutting bill would save $50 billion over five years by imposing new fees on Medicaid recipients, trimming the food stamp rolls, squeezing student lenders and cutting federal child support enforcement.

"I don't think it makes any sense to go through all the difficulty they just went through with the budget-cutting bill, then give it all back in tax cuts," said Robert L. Bixby, executive director of the Concord Coalition, a nonpartisan budget watchdog group. "If they want to cut taxes, fine, but they are going to have to cut spending by at least that much to help the deficit, and clearly they are not willing to do that. They have to start looking reality in the face."

Under rules reserved for the least controversial bills, the House yesterday approved three tax bills in rapid succession. The first, at a cost of $31.2 billion, would slow the expansion of the alternative minimum tax, a parallel income tax system designed to prevent the rich from dodging taxation but that increasingly has affected the middle class.

The next, at a cost of $7.1 billion over five years, would provide an array of tax breaks to create President Bush's proposed Gulf Opportunity Zone in the region ravaged by hurricanes Katrina and Rita. Businesses could write off much of the cost of new structures and equipment, while the states of Louisiana, Mississippi and Alabama would be granted tax-exempt bond authority for their own rebuilding.

Bowing to pressure from Rep. Frank R. Wolf (R-Va.) and other social conservatives, GOP leaders exempted casinos, country clubs, hot tub facilities, liquor stores, massage parlors, golf courses, racetracks and tanning salons from the tax breaks, exemptions the administration initially opposed.

Finally, the House passed a modest, $153 million tax break that would extend a provision allowing members of the military to use their combat pay to claim the earned income credit.

The three measures passed overwhelmingly, with virtually all Democrats voting with Republicans, and with hardly a mention of their impact on the deficit, which is projected to reach $331 billion in fiscal 2006 and remain above $300 billion a year through the end of the decade, when most of Bush's tax cuts are set to expire. The Senate has already passed similar measures, indicating that all the measures are likely to become law.

The House voted 414 to 4 to spare 17 million individuals and families from paying the alternative minimum tax next year. Democratic Reps. Jerry F. Costello (Ill.), Collin C. Peterson (Minn.), Martin O. Sabo (Minn.) and Robert C. "Bobby" Scott (Va.) voted against the measure.

In a highly partisan atmosphere, tax cutting without regard to the growing federal debt appears to be one area that both parties can agree on, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "Everybody's losing credibility right now," she said.

Debate will be considerably more rancorous today, when the House votes on a $56 billion tax package, the centerpiece of which would extend the 2003 cuts on the tax rates on dividends and capital gains through 2010. Those provisions alone would cost the Treasury $20.6 billion through 2010 and nearly $51 billion through 2015, according to the congressional Joint Committee on Taxation.

Some moderate Republicans have expressed misgivings about those cuts, which overwhelmingly benefit affluent investors, especially as Congress moves to cut programs for the poor in the name of deficit reduction. But House GOP leaders expressed confidence yesterday that the tax cuts will pass, saying that the cuts would add to the tax revenue by generating more economic growth.

"By cutting taxes, you grow the economy, and you generate an enhanced flow of revenues to the Treasury," said Rep. David Dreier (R-Calif.), chairman of the House Rules Committee.

Although the federal tax revenue has grown since the passage of the 2003 tax cuts -- from $1.9 trillion in 2004 to $2.1 trillion in 2005 -- the tax revenue measured against the size of the economy remains below the 2002 level and well below the level of 2001, when the first of Bush's five tax cuts was passed. "The argument that tax cuts will grow the economy and pay for themselves is very attractive, but it's just not true," MacGuineas said.

Today's vote on the capital gains and dividend tax cut extension promises to bring out the deficit-reduction rhetoric that was absent yesterday. In 2003, Congress lowered the tax rate on dividends to 15 percent from as high as 38.5 percent. The rate on most capital gains was lowered to 15 percent from 20 percent.

Democrats have long charged that the cuts overwhelmingly benefited the affluent. The liberal watchdog group Citizens for Tax Justice says that the richest 1 percent of Americans, with an average income of almost $1.3 million in 2009, would enjoy 53 percent of the value of the extension that year, while 78 percent would receive no benefit.

A recent study by economists at the Federal Reserve concluded that the dividend tax cut had no real impact on the stock market and prompted "only muted gain in total corporate payouts."

In contrast, Americans for Tax Reform maintains that dividend payouts among the largest companies have jumped 59 percent, while the number of firms offering dividends soared after the tax cuts.

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