Bush, Hill Republicans Agree To Extend Expiring Tax Cuts

By Jonathan Weisman
Washington Post Staff Writer
Wednesday, May 3, 2006

President Bush and congressional Republicans agreed yesterday on a $70 billion package of tax-cut extensions that they hope will help halt the deterioration of their political fortunes.

The package would extend the 2003 cuts to the tax rates on dividends and capital gains, continue tax breaks for small-business investment and the overseas operations of financial service companies, and slow the expansion of the alternative minimum tax, a parallel income tax system that was enacted to target the rich but is increasingly snaring the middle class.

But the agreement cannot come to a vote until House and Senate negotiators agree on a second piece of legislation containing many of the proposed tax breaks left out of the compromise, according to legislative aides. And the compromise is sure to spark a new round of recriminations from Democrats, who say the Republican Party continues to favor wealthy investors over lower- and middle-income workers, without regard to a budget deficit that is expected to reach $370 billion this year.

For the Republicans, the tax cuts may have to substitute for other measures proposed last week to help consumers cope with gasoline prices. Proposals including a federal gas tax holiday and a $100 rebate have run into a buzz saw of opposition from businesses and oil interests as well as consumers. House Majority Leader John A. Boehner (R-Ohio) dismissed the Senate Republicans' proposed $100 rebate as "insulting," adding that his own constituents considered it "stupid."

With little progress on the energy front, Bush summoned Republican leaders and tax writers to the Oval Office yesterday to force an agreement on a tax bill that has languished since late last year. The president is scheduled to speak today on the economy and taxes, and he implored lawmakers to deliver an agreement he could tout.

"The tax relief that the president advocated and passed is working to do exactly what it was intended to do: get the economy growing and help create jobs. To keep our economy strong and growing, the tax relief needs to be made permanent," White House spokesman Scott McClellan said yesterday. "Particularly at a time when Americans are paying more at the pump, the president believes the last thing they need is for Washington to take more of their hard-earned dollars out of their pockets."

"We are going to have a bill," Boehner promised. "The president really wants a tax bill."

The agreement comes at a difficult time for Republicans, with gasoline prices soaring, the budget deficit rising and their approval ratings in an extended slide. The compromise measure falls well short of making Bush's first-term tax cuts permanent. Instead, all of the major tax cuts passed in 2001 and 2003 would expire at the end of 2010.

In 2003, Congress passed a measure to lower the tax rate on most dividends to 15 percent from as high as 38.6 percent and to lower rates on most capital gains from 20 percent to 15 percent. That measure is set to expire in 2008 but would be extended through 2010 under yesterday's agreement, at a cost to the Treasury of $21 billion over five years and an additional $30 billion between 2011 and 2015, according to aides familiar with the deal. The alternative-minimum-tax provision would restrict the reach of the tax for one year, at a cost of $34 billion.

The agreement would also allow small businesses to write off investments worth up to $100,000 for an additional two years, 2008 and 2009, while letting banking, securities and insurance companies defer income tax payments on overseas trading profits for one additional year.

The agreement is a clear victory for Bush, whose success in Congress has waned sharply since his reelection in 2004.

The House had given the president what he wanted last year -- an extension of the tax cuts for dividends and capital gains. But Sen. Olympia J. Snowe (R-Maine) single-handedly blocked that extension in December, protesting that Congress should not be extending tax cuts that benefit the wealthy while lawmakers are advancing a broad budget-cutting bill that mainly targets programs for the poor, such as Medicaid and welfare. Instead, the Senate tax bill centered on alternative-minimum-tax relief and tax incentives for the Gulf Coast.

Those Katrina relief measures ultimately passed late last year on their own, leaving enough room for both Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) and House Ways and Means Committee Chairman Bill Thomas (R-Calif.) to get their priority provisions.

The final package is likely to be unpopular with most Democrats because the vast majority of the direct benefits will go to wealthy investors and businesses.

"You talk about completely detached from reality, that's this place," said Sen. Kent Conrad (N.D.), the ranking Democrat on the Senate Budget Committee.

Grassley missed the White House meeting, saying he had prior commitments with constituents. The senator is demanding a commitment from Thomas that both chambers would move a separate tax bill to extend the expiring tax deductions for college tuition, the hiring of former welfare recipients, and state and local sales taxes. Grassley also wants an additional year of alternative-minimum-tax relief.

Thomas is pushing hard for a vote now on the first tax bill. "If the first bill is done, it should be signed," said Thomas spokeswoman Ianthe Jackson.

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