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Tax Talk

Tax cuts in jeopardy this holiday season
Scripps Howard News Service


December 02, 2005

WASHINGTON - Tax cuts have been an annual Christmas gift from this Bush presidency, but this year Republicans are split over whose taxes to cut in the face of exploding deficits and spending cuts that target poor families.

Bush and House Republicans want a $63 billion package the House will take up when lawmakers return next week. It extends the president's dividend-and-capital-gains tax cuts for investors.

Senate Republicans approved a $58 billion alternative before Thanksgiving recess, but it dropped Bush's priority of extending capital gains and dividend cuts past their 2008 expiration date.

Both bills would help higher-income taxpayers, but the House version would give 51 percent of the tax cuts to the top 1 percent - people making $1.1 million or more a year - according to the Tax Policy Center, a nonpartisan Washington think tank. The Senate bill helps the well-off, but only 12 percent would go to the $1 million-or-more set, with 58 percent going to taxpayers making $50,000 to $200,000.

How House, Senate plans compare
Scripps Howard News Service

The tax bill the House takes up when Congress returns next week extends cuts in capital gains and dividend taxes, contains no Alternative Minimum Tax relief, and provides half its cuts to taxpayers with incomes of $500,000 or more a year. The Senate-passed version does the opposite, and two-thirds of its cuts go to people making $100,000 to $500,000. Here's how the two plans compare by income levels:


   Share of   Average   Share of   Average
 Income  Tax Cut  Cut   Tax Cut  Cut
 $0-10K   0.1%  $3  0.1%  $3
 $10K-20K  1%  $24  1%  $22
 $20K-30K  2%  $43  2%  $38
 $30K-40K  2%  $50  2%  $44
 $40K-50K  2%  $82  2%  $68
 $50K-75K  7%  $135  6%  $126
 $75K-$100K  7%  $256  11%  $400
 $100K-200K  16%  $471  41%  $1,239
 $200K-500K  14%  $1,531  26%  $2,931
 $500K-$1M  8%  $5,346  2%  $1,648
 $1M +  40%  $50,984  8%  $10,651

Source: Tax Policy Center

The main reason the Senate bill is less generous to $1 million-a-year taxpayers is that it contains a one-year patch for the Alternative Minimum Tax, a parallel income tax enacted in 1969 to ensure that the super-rich pay at least a little tax. But because the Alternative Minimum Tax isn't adjusted for inflation, it will hit 20 million families next year, including some households making as little as $75,000, absent a change in tax law.

The Senate bill contains other provisions not in the House bill, including $8 billion in Katrina-related tax relief and $2 billion so non-itemizers can write off their charitable contributions.

The Senate bill also includes a tax-shelter crackdown worth $15 billion along with a temporary accounting change that would raise big oil companies' taxes by $5 billion this year.

Analyst Kim Wallace, who watches Washington for Wall Street investment bank Lehman Brothers and its clients, rates the chances that Congress will agree on tax cuts at slightly better than 50-50 before the nation rings in the new tax year Jan. 1, given these deep divisions in Republican ranks.

Economist Joel Friedman of the liberal Center on Budget and Policy Priorities agrees: "It's unclear how the House and Senate will resolve these large differences."

For now, he said, the only New Year's tax relief that's a sure bet are two provisions of the 2001 tax cut that don't kick in until Jan. 1, 2006: gradual repeal of some itemized deductions and personal exemptions for high-income taxpayers.

Some 97 percent of these two future tax cuts will go to people making more than $200,000 a year, and 56 percent of it to $1 million-a-year taxpayers, the Tax Policy Center reports, while Congress' nonpartisan Joint Committee on Taxation estimates the cost to the Treasury at $146 billion over the decade.

Friedman noted that congressional spending cuts - $50 billion by the House and $30 billion by the Senate - won't offset proposed tax cuts. In addition, $63 billion for Gulf Coast hurricane recovery has already been approved, and Congress is spending $6 billion a month on the war in Iraq.

These competing demands have pressured Republicans to cool toward tax cuts and readjust priorities, according to Marshall Wittmann, a conservative activist and onetime aide to President George H.W. Bush and Sen. John McCain, R-Ariz., who is now with the Democratic Leadership Council.

"We've been through four years of Disneyland economics, based on believing in tax cuts and growing the government, but now the reality is setting in that, even though nobody likes paying taxes, they're not the only concern," Wittmann said.

Republican anti-tax lobbyist Grover Norquist, the founder of Americans for Tax Reform who famously vows to "shrink the size of government so you can drown it in the bathtub," said recently, "We were going the wrong direction on spending," but believes Republican Washington is finally turning things around.

Norquist told a recent breakfast with reporters that it's heresy to suggest the GOP won't deliver tax cuts this year. He predicted that Bush and House Republicans will prevail.


Contact Mary Deibel at DeibelM(at)
Distributed to subscribers by Scripps Howard News Service.

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