- The Washington Times - Friday, May 16, 2003

The Senate passed a $350 billion tax bill last night after first approving a temporary elimination of the double taxation of dividends, preserving at least part of the centerpiece of President Bush’s tax-cut proposal.

“I’d rather put $350 billion in taxpayers’ pockets than have the money stay in Washington, where 535 members of Congress will spend it,” said Sen. Charles E. Grassley, Iowa Republican and Finance Committee chairman. “That money will do a lot more economic good outside Washington, D.C.”

But the vote on dividends was the critical test in the debate on the overall bill, which passed 51-49 with three Democrats joining 48 Republicans in voting for it. Voting against it were 45 Democrats, three Republicans and the chamber’s lone independent.

The Senate adopted a complete but temporary elimination of tax individuals pay on corporate income. The amendment cuts in half the tax individuals will pay on dividend income for 2003 and eliminates it from 2004 to 2006. The tax would then be reinstated for 2007.

Vice President Dick Cheney casting the tie-breaking vote on the amendment, which passed 51-50.

Dividend income is already taxed as corporate earnings, and Republicans have argued that taxing it again as individual income amounts to double taxation.

But Sen. Max Baucus, Montana Democrat, said it will be difficult for businesses to plan based on the tax being reinstated.

“This is a huge yo-yo tax provision — now you see it, now you don’t,” Mr. Baucus said.

The president had initially proposed a 10-year, $726 billion bill that eliminated the tax individuals pay on dividend income, and while the Senate couldn’t do that within the $350 billion budget-imposed cap, Republicans said they were determined to deliver him at least a temporary elimination.

“I think the president has had some tremendous victories today, but most important, this is something that will respond to the needs of people — creating jobs,” Mr. Grassley said.

Democrats called the move to reinstate the tax in 2007 a gimmick, arguing that Congress then would almost certainly extend the tax cut before it expires.

And Republicans didn’t disagree. Sen. Don Nickles of Oklahoma said on the Senate floor Wednesday that the four-year period would be enough time to determine whether the policy works.

Two Democrats, Sen. Zell Miller of Georgia and Sen. Ben Nelson of Nebraska, voted for the amendment, offsetting the Republicans who voted against it: Sens. Lincoln Chafee of Rhode Island, John McCain of Arizona and Olympia J. Snowe of Maine.

Every senator voted the same way on the overall bill, with the exception of Sen. Evan Bayh, Indiana Democrat, who voted against the dividend amendment but for the overall bill.

Mr. Nelson’s support was secured when Republicans agreed to offer $20 billion in aid to states to help them bridge their own budget gaps.

Mr. Cheney was on call for much of the day as senators anticipated the critical vote on the amendment to phase out double-taxation.

He arrived in the presiding officer’s chair in the middle of the vote in order to break the tie. It’s the second time his vote has helped push along the president’s tax cut. Several weeks ago he was the deciding vote to pass the Republicans’ budget.

Mrs. Snowe, whose support was also critical to passing the budget that allowed a $350 billion tax cut in the Senate and to getting the tax bill out of the Finance Committee, said yesterday she was voting against the bill because it is a “risky, highly speculative and ill-conceived approach.”

The bill will now go to a conference committee where differences with $550 billion tax cut passed in the House will be worked out.

The Senate plan actually includes $422 billion in new tax cuts and $20 billion in aid to the states. That required senators to find $92 billion in offsets, most of which came from higher user fees and closing existing tax breaks.

One contentious tax break the Senate closed was an exemption currently offered to Americans on the first $80,000 of income they earn overseas, if they already pay tax on that money to a foreign country.

Sen. John B. Breaux, Louisiana Democrat, offered an amendment to keep the exemption in place, but Republicans said that would have blown a $32 billion hole in the bill. The amendment lost a 51-49 vote.

Still, House Republican leaders have said they oppose new tax increases in order to offset new tax cuts. The Bush administration has not taken a position.

The Senate adopted the House’s shorter-lived but more-generous provisions on business expensing, a move designed to spur business investment. Both chambers’ plans accelerate already-planned tax cuts such as the income-tax rate reductions and child tax credit from Mr. Bush’s 2001 tax-cut package. But the Senate bill does not go as far as the House bill on the marriage penalty.

The House plan, meanwhile, treats dividend income like capital gains, and then drops the tax on capital gains to 5 percent for lower-income people and 15 percent for upper-income taxpayers. When applied to dividend income, that is less than half the tax high-income individuals currently pay.

Yesterday morning, House Speaker J. Dennis Hastert, Illinois Republican, defended the House version against the Senate’s plan.

“If the dividend is 50 percent and then nothing, and all of a sudden it is back to 100 percent or whatever it is, my feel is that it does not solve the problem,” he said. “We have, I think, a very good bill. I think we have a very even approach to both dividends and capital gains.”

The House-Senate conference promised to be difficult since the House proposal is worth $200 billion more than the Senate’s. Mr. Grassley yesterday reiterated his promise to hold any final agreement to a $350 billion cap.

All told yesterday, the Senate held roll-call votes on about 30 amendments. But after 12 hours of nearly nonstop voting, senators seemed to lose steam and amendments were either withdrawn or failed by voice votes.

Among the failed proposals was a Democratic alternative sponsored by Minority Leader Tom Daschle, South Dakota Democrat.

His $152 billion plan would have accelerated the child tax credit, offered business investment incentives and given a tax rebate of up to $300 per person, with a maximum of $1,200 per family. It also included a larger state-aid component.

But it failed on a 54-46 vote with four Democrats voting against it and one Republican voting for it.

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