The House and the Senate overwhelmingly voted last night to extend three tax cuts aimed at the middle class, along with an array of business tax breaks, sending President Bush a $146 billion tax cut that would be his fourth in four years.
With the approval of the legislation, virtually all of Bush's first-term tax agenda -- four tax measures worth nearly $1.9 trillion over 10 years -- would survive a potential second Bush term, unless Washington elects to change the tax code again. The total is $300 billion more in tax relief than Bush envisioned with his first tax-cut proposal in 2001.
But the tax cut would exacerbate a budget deficit that will probably have to be addressed in the next presidential term, no matter who is in the Oval Office. Some Democrats and moderate Republicans argued this summer that the extensions should be financed with spending cuts or tax-loophole closures, but that stand withered with the approaching election. The tax cut passed the House 339 to 65 last night. It then passed the Senate 92 to 3, with only retiring Ernest F. Hollings (D-S.C.) and budget hawks Olympia J. Snowe (R-Maine) and Lincoln D. Chafee (R-R.I.) opposed.
"Anyone voting 'no' is voting for a tax increase for the American people, especially on the middle class," warned Rep. Jim McCrery (R-La.), framing the terms of the debate. "That's the bottom line on this bill."
The latest tax package was not subjected to the partisan divisions that had marked the previous tax cuts because its centerpiece is the extension of three popular tax cuts aimed at lower- and middle-income taxpayers. The president pushed hard for the extension, and he said after the vote: "This legislation will give families and small businesses added certainty and keep us on the path to greater prosperity." His opponent for the White House, Sen. John F. Kerry (D-Mass.), backed it, as well.
Kerry said in a statement: "Millions of American families are being squeezed by the weak Bush economy, falling incomes and rising health costs, and we should extend middle-class tax breaks to help them."
The legislation would extend the $1,000-per-child tax credit, rather than letting it slip back to $700 next year. It would extend tax breaks for married couples that otherwise would also have to be trimmed in 2005. And it would prevent the 10 percent income-tax bracket from being applied to smaller amounts of earned income, as was the case in the past.
To hold down the cost of last year's $350 billion tax cut, Republican tax writers had decided to let those measures expire at the end of 2004, confident that they almost certainly would be extended in an election year.
The new tax bill would also prevent a dramatic rise in the alternative minimum tax, a parallel income tax system that was designed to tax the wealthy but that is increasingly hitting the middle class. The tax bill's $22.6 billion AMT "fix" would last only one year.
A recent analysis by the accounting firm Deloitte Tax LLP concluded that middle-income taxpayers would see a "sizable percentage hike in taxes" if the cuts are not extended. A family of four earning $63,000 would see its taxes rise by $700 -- or 27 percent -- primarily because its child credits would shrink. A more affluent family of four earning $150,000 would see its taxes rise by $1,800 -- or 8.5 percent of its total federal tax payment -- mainly because of its lost marriage tax break and the rising AMT hit.
The bill would also extend for one year a variety of business tax breaks -- from wind energy credits to corporate research deductions -- at a cost to the Treasury of $13 billion.
Democrats did have their complaints. They failed to make changes to the child credit that would have prevented some poor families from losing some or all of their child tax-relief payments as inflation eats away at their eligibility. And they fumed that Republicans decided to extend most of the tax cuts for five years but chose to extend for two years a provision benefiting soldiers in the combat zones of Iraq and Afghanistan.
But the core of the bill proved irresistible. "Who would contest these types of things?" asked Rep. Charles B. Rangel (N.Y.), the ranking Democrat on the House Ways and Means Committee.
The latest tax cut would ensure that none of the major tax measures Bush championed in his first term would expire during his potential second term. The next Bush tax measure set to expire is last year's deep cut on the tax rate paid on capital gains and dividends, which will end in 2009.
But the next president will still face two problems that tax writers have either exacerbated or procrastinated about: the record budget deficit and the alternative minimum tax. A 10-year remedy to the AMT problem could cost the government $602 billion, if all the Bush tax cuts are extended beyond their 2010 expiration date, according to the Congressional Budget Office.
As for the budget deficit, the latest tax cut is "just going to make it worse," said Robert Bixby, executive director of the Concord Coalition, a nonpartisan budget watchdog. The bill "postpones all the hard choices on the deficit. What it shows is Congress is still not taking the deficit seriously."
At the request of House Democrats, the CBO -- Congress's official budget scorekeeper -- released new deficit projections that assumed Washington would stick to Bush's tight controls on spending, fix the AMT, enact all of the president's proposed tax cuts, and slowly draw down the military forces in Iraq and Afghanistan. Under that scenario, this year's $422 billion deficit would dip to $353 billion in 2005 and to $312 billion in 2006, before slowly rising to $439 billion by 2014. Over that decade, the amount of government debt held by the public would nearly double, to $8 trillion, from $4.3 trillion today.
The president would not come close to meeting his pledge to cut the budget deficit in half in five years, according to the estimates.
Democrats did offer procedural motions to instruct tax writers to offset the cost of the tax cut by raising taxes on millionaires, but the motions were struck down along party lines. Ultimately, few would vote against an election-year bill to avert tax increases on middle-class families.
"This is political," House Minority Leader Nancy Pelosi (D-Calif.) said. "My advice to my colleagues is, when they are dealing politically on the floor, you deal with it any way you need to deal with it."