GOP Reaches Deal on Tax Cuts
$70 Billion Measure Would Extend Breaks
By Jonathan Weisman and Paul Blustein
Washington Post Staff Writers
Wednesday, May 10, 2006; A01
House and Senate Republican negotiators reached a final agreement yesterday on a five-year, nearly $70 billion tax package that would extend President Bush's deep cuts to tax rates on dividends and capital gains, while sparing about 15 million middle-income Americans from the alternative minimum tax.
Republican leaders hope to pass the agreement swiftly. House consideration is scheduled for tonight, with the Senate likely to send the measure to the White House for the president's signature by the end of the week. But the package remains controversial, with GOP leaders saying it is essential to sustain a strong economic recovery and Democrats and a few Republicans saying the cuts would mainly benefit the wealthy and add to the long-term deficit.
"Keeping taxes low helps Americans find and keep work, supports families and communities with good job bases, and makes America a great place to do business for companies both here at home and those overseas looking for a place to invest," Senate Majority Leader Bill Frist (R-Tenn.) said in a statement.
But with the budget deficit still expected to exceed $300 billion this year, despite a strong economy, opponents say the government cannot afford to add $70 billion more over the next five years.
"The point is the preponderance of these revenues will go to upper-income people, people who make a million dollars or more," Sen. Olympia J. Snowe (R-Maine) said yesterday. "It's a question of priorities."
Republican leaders say the tax cuts, especially the investor breaks passed in 2003, are responsible for strong economic growth that has bolstered federal tax receipts over the past year and whittled down deficit forecasts by as much as $70 billion.
Even though the dividend and capital gains tax cuts are not set to expire until 2008, Republicans say extending them now through 2010 is vital to preserve economic stability and maintain a robust investment climate that has pushed the Dow Jones industrial average to near-record heights.
Critics maintain that those tax cuts have overwhelmingly benefited the wealthy, while budget cuts target programs for the poor to close a deficit created largely by tax cuts totaling nearly $2 trillion since Bush took office.
Middle-income households would receive an average tax cut of $20 from the agreement, according to the joint Urban Institute-Brookings Institution Tax Policy Center, while 0.02 percent of households with incomes over $1 million would receive average tax cuts of $42,000.
The tax agreement would cut revenue to the Treasury by $90 billion over the next five years, but other measures would raise about $21 billion -- for a net loss to the Treasury of about $69 billion. By keeping the total five-year cost below $70 billion, negotiators satisfied arcane Senate budget rules, thus protecting the package from a filibuster and ensuring passage with a simple majority.
Some of those revenue raisers will be controversial. One measure would allow upper-income savers with a traditional individual retirement account to pay taxes on the account's investment gains and then roll over some of the balance into a Roth IRA, where the money can be withdrawn tax-free upon retirement. The provision would raise about $6.4 billion over 10 years, seemingly keeping the size of the tax-cutting package down. But over the next 35 years, it would cost the government $36 billion, according to the Urban Institute.
"And it's losing the money when we're really going to need it," said Leonard Burman, an economist at the Urban Institute.
Another provision would roll back tax breaks offered to the five biggest petroleum companies for oil and gas exploration. Two other Senate-passed provisions that would have hit Big Oil much harder were dropped.
But the main battleground remains the investor tax cuts, which reduced tax rates on most dividends to 15 percent from as high as 38.6 percent and on most capital gains to 15 percent from 20 percent.
Republicans say those tax cuts were crucial to spurring economic growth over the past three years, by persuading more corporations to offer larger dividends and by sparking new business investment. A new report by the Republican staff of Congress's Joint Economic Committee notes that from mid-2000 to early 2003, nonresidential business investment plunged at a rate of 5.6 percent a year. From mid-2003, when the investment tax cuts were steaming toward passage, to early 2006, such investments grew by 9.2 percent a year.
The stock market's recovery followed a similar timeline, as has employment growth. And federal tax revenue since the 2003 tax cut has rebounded from $1.9 trillion in 2004 to an anticipated $2.3 trillion this year.
"It was as if a light switch has been thrown on," Treasury Secretary John W. Snow said yesterday. "Rarely has a piece of public policy been so effective, with the effects so evident and immediate."
Some economists say the timing of those gains was coincidental. "You might credit the cuts with providing a little bit of a jump-start. But I think the main reason the economy has done so well the last couple of years has nothing to do with tax policy, and more to do with the corporate sector starting to spend some of their record profits," said Ethan Harris, chief U.S. economist of the Lehman Brothers investment bank. "We had very good markets in the '90s, before all these tax cuts went into effect," said former Treasury secretary Robert E. Rubin.
The federal budget deficit, although smaller than the record $413 billion of 2004, will still be more than $300 billion this year, about where it was last year. And measured against the size of the economy, tax revenue remains well below where it stood before Bush began cutting taxes. In 2000, federal tax receipts equaled 20.9 percent of the gross domestic product. They fell to 16.3 percent of the GDP in 2004 before recovering to a projected 17.7 percent this year.
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