The House and Senate gave final approval to a far-reaching package of tax breaks yesterday, handing President Bush a major victory on his top legislative priority at the close of a tumultuous week in which he and the Republicans lost control of the Senate.
The tax cut, the largest approved by Congress in two decades, provides for millions of refund checks of up to $600 apiece to be mailed to Americans this summer, and grants reductions in most tax rates, tax relief for married couples and parents of young children, and a repeal of the estate tax, though not until 2010.
All of these were priorities set out by the president, who welcomed the tax bill's passage after returning to the White House from Camp David. The plan "cuts income taxes for everyone who pays them. Nothing could be more profound, and nothing could be more fair," Bush said.
The tax plan, which was approved by Congress 109 days after Bush first formally proposed it, will profoundly affect government finances for the rest of the decade -- and perhaps beyond. It sets in motion a new battle on Capitol Hill, as lawmakers confront the need to contain government spending to help pay for the loss of revenue from the tax reductions.
Although Congress approved the president's legislation with remarkable speed, the battle over Bush's tax and budget proposals came at great political cost. It played a role in Vermont Sen. James M. Jeffords's decision Thursday to leave the Republican Party and vote with the Democrats as an independent, putting the GOP into the Senate minority for the first time in six years. The shift of power, which will take place when Congress returns in June from its one-week recess, creates an unanticipated new obstacle for many of Bush's other legislative initiatives.
Some of the tax cuts will be retroactive, allowing the Treasury Department to begin sending checks to taxpayers later this summer. Single taxpayers will receive up to $300 each, while heads of household will get up to $500 and married couples up to $600. But to keep the overall cost within the 11-year, $1.35 trillion framework required by the congressional budget outline, many other parts of the plan are delayed for years. The entire package is to terminate after just nine years, leaving it to a future Congress and president to reinstate.
Meeting in a rare early-Saturday-morning session, bleary-eyed House members passed the measure 240 to 154, with 28 Democrats and one independent joining 211 Republicans. Two hours later, the Senate approved the bill 58 to 33, with 12 Democrats supporting the compromise. No Republicans opposed the bill in the House, while two -- Sens. John McCain of Arizona and Lincoln D. Chafee of Rhode Island -- voted against it in the Senate. Jeffords voted for the bill. Among area lawmakers, Republicans supported the bill; Democrats opposed it.
The concept of issuing checks to provide immediate tax relief -- and help stimulate the economy -- was not in Bush's original plan and had not been included in either the House or Senate versions of the legislation; the House and Senate proposals had instead called for adjusting taxpayers' withholding tables.
But the administration, confronting claims from economists that adjusting the withholding tables would not provide a big enough economic boost and charges from Democrats that the tax cut was geared for the wealthy, pressed for including the refund checks in the final tax deal.
The refunds ultimately were included in the final bill, and Bush seized on them in his remarks yesterday. "The check will literally be in the mail," he declared with a smile, adding: "The checks are the first installment of lasting, long-term reductions in tax rates."
The Treasury will begin mailing the checks in the third week of July and hopes to have them all distributed by early October. Taxpayers who have filed their 2000 returns will be eligible to receive the checks, which will be issued in the order of the last two digits of a person's Social Security number, starting with 00.
Bush said the plan is based on "principles that are compassionate and conservative." But he took note of the impending change in Senate control and defended himself against charges by some GOP moderates in the wake of Jeffords's defection that he had been unresponsive to their concerns.
"We listened to the voices of those in my party and in the Democratic Party who wanted additional help for those at the lowest end of the economic ladder," he said. During the negotiations over the bill, however, the administration tried to water down those elements.
Senate Democrats who fought the plan immediately signaled that they will use their new majority status to possibly delay or repeal parts of it. They said the bill has hidden costs that will ultimately force the nation to begin running deficits again.
"This is a tax fraud in more ways than one," said Sen. Thomas A. Daschle (D-S.D.), who will become the majority leader after the Memorial Day recess. "We will revisit these issues. We will try to find ways to make corrections."
The Center on Budget and Policy Priorities, a left-of-center budget group that opposed the plan, calculated that if the expiring tax provisions in the bill are extended for the full 11 years, the total cost would balloon to $1.9 trillion.
The tax bill reduces the top rate from 39.6 percent to 35 percent by 2006, while the president had sought a 33 percent rate. But tax analysts noted that the bill also eventually repeals the phase-out of personal exemptions and itemized deductions for upper-income taxpayers, which effectively reduces the top rate to 33 percent.
Citizens for Tax Justice, a research organization that has the only nongovernmental tax model for analyzing the distribution of tax cuts, reported that the top 1 percent of taxpayers will receive 25 percent of the income tax cuts, and nearly 38 percent of the total tax reduction when the estate tax is included. The top 1 percent pays 35 percent of federal income taxes and 23 percent of all federal taxes.
The key provisions of the bill include:
* Reduction in top income rates. The rate cuts start taking effect on July 1, which means taxpayers may see an increase in their take-home pay in a little over a month. Besides the reduction in the top rate, by 2006 the bill will also lower the 36 percent rate to 33 percent, the 31 percent rate to 28 percent, and the 28 percent rate to 25 percent. The 15 percent rate, paid by about three-quarters of taxpayers, will remain unchanged.
* Creation of a new 10 percent bracket. Retroactive to the beginning of the year, the rate will drop from 15 percent to 10 percent on the first $6,000 of taxable income for singles, $10,000 for heads of household and $12,000 for married couples. This will result in savings of up to $300, $500 and $600, respectively.
* Increasing the $500 per child credit to $600 this year, $700 in 2005, $800 in 2009 and $1000 in 2010. In a significant change, the child credit could also be claimed in part by workers making a little over $10,000 a year, even if they owe no income tax.
* Phaseout of the marriage penalty. Starting in 2005, the bill will gradually begin to address the problem faced by about half of married couples, who end up paying more in taxes by filing a joint return than if they filed as singles.
* Repeal of the estate tax. The bill will gradually raise the exemption and lower the rates for the estate tax, which affects about 2 percent of decedents. The exemption, now on the first $675,000 of assets, will rise to $1 million in 2002 and eventually to $3.5 million in 2009. The top tax rate will drop from the current 55 percent to 45 percent by 2007. The estate tax will be repealed in 2010, though gift taxes will remain in effect.
* Dozens of expanded tax breaks for education and retirement. Contributions to individual retirement accounts, now limited to $2,000 a year, will be allowed to rise to $5,000 in 2008, while contributions to 401(k) plans will be allowed to climb from $10,500 now to $15,000 in 2006. As much as $5,000 in college tuition will become deductable, though the tax break will expire in 2005.
All of these provisions will expire at the end of 2010, an accounting maneuver that kept the cost below $1.35 trillion and allowed a deal to be struck. Since Republicans had placed the tax bill on a fast-track process allowing limited debate, an obscure Senate rule would have required the bill to lapse at the end of fiscal 2011. But when negotiations were at an impasse, lawmakers realized that they could move up the date.
By terminating the tax cuts at the end of 2010, negotiators were able to avoid some tough decisions. Since they could now distribute the same amount of money over nine years rather than 10 years, they effectively boosted the size of the tax cut while at the same time hiding its true cost.
The debates in both the House and Senate yesterday were short and largely rehashed old arguments, as lawmakers scrambled to pass the bill before noon so they could depart for the weeklong recess.
As the House Rules Committee met at 6:30 a.m. to set the parameters for the debate, Democratic caucus leader Martin Frost (Tex.) -- who usually delights in ribbing the panel's chairman, David Dreier (R-Calif.) -- asked just one question: Is it true the tax cuts outlined in the bill would end in 2010?
"I guess what it means is sometime in the next decade, Congress needs to address this," said Dreier, who was slightly rumpled after having spent the night on his office couch.
"This just seems like a peculiar way to legislate," Frost retorted. "People want some certainty in tax law."