Tax Cut Extension Only for the Rich

NYTimes May 12, 2006

Senate Approves 2-Year Extension of Bush Tax Cuts

By EDMUND L. ANDREWS

WASHINGTON, May 11 — The Senate voted 54 to 44 on Thursday to pass almost $70 billion in tax cuts, mostly for the nation's wealthiest taxpayers. The action ensures that virtually all of President Bush's tax cuts will be locked in place until after the next presidential election.

The measure, which the House passed Wednesday, would extend Mr. Bush's tax cuts on stock dividends and capital gains until 2010, and shield about 15 million affluent families for one year from an increase in the alternative minimum tax.

The vote, largely along party lines, was a significant victory for Mr. Bush and beleaguered Republican leaders, who had viewed the tax cuts on stock market profits as a defining party issue and had credited them with jump-starting economic growth and reducing unemployment over the last three years.

But even as Senate Republicans celebrated, they failed to reach agreement with House Republicans on scores of other tax breaks, including deductions for college tuition and a savings credit for low-income people that expired last year.

Democrats charged that the tax bill focused almost entirely on cuts for wealthy investors and that it allowed programs intended for ordinary citizens to languish.

House Republicans, meanwhile, remained in disarray over a budget plan for next year. After promising earlier Thursday to vote on the plan, which by law was to have been passed on April 15, House leaders postponed the vote after failing to reach agreement with Republican moderates who wanted $3 billion more for health and education.

Even if House Republicans pass a budget plan this month, it would have little practical impact because it would probably not be reconciled with a very different plan passed by the Senate.

The tax bill, which President Bush is expected to sign as quickly as possible, could set the stage for budgetary heartburn in the years ahead.

Virtually all of President Bush's tax cuts in addition to those passed Thursday — rate reductions for individuals, a bigger child tax credit, the elimination of estate taxes and the tax cuts for stock dividends — will also expire simultaneously at the end of 2010.

Renewing all those tax cuts again in 2010 would cost hundreds of billions of dollars a year, posing excruciating budget choices for the next president as the nation's baby boomers become eligible for billions of dollars in Medicare and Social Security benefits.

In addition, lawmakers merely postponed dealing with huge problems surrounding the alternative minimum tax, a parallel tax that was originally aimed at millionaires but is not adjusted for inflation and is set to engulf millions of middle-class families. The vote only prevents expansion of the tax this year.

Preventing an expansion of the alternative tax in 2007 would cost more than $40 billion, and the costs increase each year after that. A permanent solution, according to most experts, would require an overhaul of the tax code, but neither Mr. Bush nor Congressional leaders want to touch the issue this year.

The overwhelming share of the tax cuts the Senate voted to extend will flow to the wealthiest taxpayers. People earning $1 million a year would save about $42,700, and reap about 22 percent of the total tax cut, according to the Tax Policy Center, a research group in Washington. People earning $40,000 to $50,000 a year would save about $47 and receive less than 1 percent of the benefits.

Democrats charged that the measure not only favored the rich but also failed to extend middle-income tax breaks, among them a deduction for college tuition payments, that expired at the end of last year.

Republicans promised that those and at least $20 billion worth of other expiring tax cuts would be renewed in a second bill. But after more than a week of negotiations behind closed doors, House and Senate Republicans had not reached agreement on the second bill and refused to disclose any specific provisions.

The struggle to extend Mr. Bush's tax cuts reflects the broader difficulties of Republican leaders. Rebellious fiscal conservatives in the House are pushing for deeper cuts in spending, including on programs like Medicaid. But Republican moderates, particularly in Northeastern states that lean Democratic, are pushing in the opposite direction.

Given the budget pressures, Republicans have been torn for months over what tax cuts they truly wanted to extend within a $70 billion "reconciliation" bill that could pass the Senate with a simple majority of 51 votes rather than the 60 votes needed to prevent a filibuster.

Mr. Grassley said his top priority was to prevent an expansion of the alternative minimum tax in 2006, a measure that will cost about $34 billion this year alone. President Bush and House Republicans placed top priority on a two-year extension of tax cuts for stock dividends and capital gains. Those cuts do not expire until the end of 2008, but the administration wanted to lock them in place.

House and Senate leaders also wanted to extend more than $30 billion worth of other tax breaks that expired at the end of last year. Those included a lucrative provision for small businesses, a longstanding tax credit for research and development expenses, tax deductions for college tuition payments and a tax cut for banks and insurance companies with foreign subsidiaries.