The House approved yesterday $56 billion in tax cuts that would keep alive the deep reductions in the tax rates on dividends and capital gains passed in 2003, but the measure is certain to be challenged by senators who have so far balked at the tax cuts for investors.
The bill passed largely along party lines, 234 to 197, after a rancorous partisan debate over whether the tax cuts would chiefly benefit the rich or sustain economic growth. Nine Democrats joined 225 Republicans for passage, while three Republicans -- Reps. Sherwood L. Boehlert (N.Y.), Jim Leach (Iowa) and Fred Upton (Mich.) -- sided with 193 Democrats and independent Bernard Sanders (Vt.) to oppose it.
The tax measure's cost would more than offset the savings in a tough budget approved by the House last month, which would trim federal spending by $50 billion over five years by imposing new fees on Medicaid recipients, squeezing student lenders, cutting federal child-support enforcement and paring the food stamp rolls.
Democrats charged that those spending cuts, largely affecting programs for the poor, are making way for tax cuts mainly for the rich that would increase the federal budget deficit. "The poor suffer, the rich benefit. The middle class is paying the bill," said House Minority Leader Nancy Pelosi (D-Calif.).
Republicans countered that allowing the tax cuts to expire would choke off the economic expansion and harm the poor far more than the modest changes to federal programs.
"The Democrats want to take away the paychecks of [my constituents], replace them with welfare checks and call that compassion," said Rep. Jeb Hensarling (R-Tex.).
Rep. David Dreier (R-Calif.) dismissed the Democrats' complaints as "pathetic arguments" and "nothing but the ideological baggage of the past."
The nine Democrats who voted for the bill were Reps. John Barrow (Ga.), Melissa L. Bean (Ill.), Dan Boren (Okla.), Bud Cramer (Ala.), Henry Cuellar (Tex.), Lincoln Davis (Tenn.), Bart Gordon (Tenn.), Jim Marshall (Ga.) and Mike McIntyre (N.C.). All Democrats from Virginia and Maryland voted against the measure, and all Republicans from those states voted for it.
The tax package was the fourth tax-cut bill approved by the House in two days, resulting in a total of $94.5 billion in cuts over five years. But yesterday's bill was the largest and most widely debated.
The measure would extend a number of tax breaks for a single year, including incentives for employing Native Americans and welfare recipients; establishing tax-free medical savings accounts; extracting oil and gas from old, marginal wells; and investing in the District.
The bill would also extend for one year a federal tax deduction for local sales taxes and for some college tuition costs. It would extend through 2009 an earlier tax break that allows small businesses to write off much of the value of investments, at a five-year cost to the Treasury of $7.3 billion.
But the centerpiece of the bill is the extension, through 2010, of the capital gains and dividend tax cuts, which lowered the tax rate on investment income to 15 percent, from as high as 38.5 percent. This extension alone is projected to cost $20.6 billion over five years and $50.8 billion over 10 years.
Although the 2003 investment tax cuts are not set to expire until 2009, President Bush and some business groups pushed hard for the extension now, arguing that uncertainty over the cuts' future would stifle investment and slow the economy. Treasury Secretary John W. Snow pointed to statistics showing that unemployment began to fall and federal tax receipts began to recover shortly after passage of the 2003 cuts. And administration officials countered Democratic arguments by saying that half of all U.S. households own stock and would benefit from the investment tax cuts.
"Lower tax rates on savings and investment have benefited millions of Americans of all income levels either directly -- through lower taxes on investment returns -- or indirectly through new and better jobs and greater economic security for families," Snow said.
The Tax Policy Center, run jointly by the Brookings Institution and the Urban Institute, has concluded that the bottom 80 percent of households would receive 15.8 percent of the House tax cuts' benefit. The top 20 percent would receive 84.2 percent of the benefit. Households earning more than $1 million a year would get 40 percent of the tax cuts, or an average reduction of nearly $51,000.
Numbers such as these have given moderate Republicans pause in the Senate. Sen. Olympia J. Snowe (R-Maine) last month single-handedly blocked the Senate Finance Committee from even considering an extension of the dividend and capital gains cuts. Instead, the committee drafted and the Senate approved a five-year, $60 billion tax cut largely aimed at restoring the hurricane-ravaged Gulf Coast and slowing the expansion of the alternative minimum tax.
Republican leaders hope to bring to the Senate floor as early as next week a final compromise with an extension of the investment tax cuts.