Congress extends tax cuts
WASHINGTON – The House and Senate overwhelmingly voted Thursday night to extend three tax cuts aimed at the middle class along with a bevy of business tax breaks, sending President Bush a $146 billion tax cut that will be his fourth in four years.
With the approval of the legislation, virtually all of Bush’s first-term tax agenda – four tax measures worth nearly $1.9 trillion over 10 years – will survive a potential second Bush term unless Washington elects to change the tax code again. The total is $300 billion more in tax relief than Bush envisioned with his first tax cut proposal in 2001.
But the tax cut will exacerbate a budget deficit that will likely have to be addressed in the next presidential term, no matter who is in the Oval Office. Some Democrats and moderate Republicans argued this summer that the extensions should be financed with spending cuts or tax loophole closures, but that opposition withered with the approaching election. The tax cut passed the House 339 to 65 Thursday night. It then passed the Senate 92-3, with only retiring Ernest Hollings, D-S.C., and budget hawks Olympia Snowe, R-Maine, and Lincoln Chafee, R-R.I., opposed.
“Anyone voting ‘no’ is voting for a tax increase for the American people, especially on the middle class,” warned Rep. Jim McCrery, R-La., framing the terms of the debate. “That’s the bottom line on this bill.”
The latest tax package was not subject to the partisan divisions that have marked the previous tax cuts, because its centerpiece is the extension of three popular tax cuts aimed at lower and middle-income taxpayers. The president pushed hard for the extension, and said after the vote, “This legislation will give families and small businesses added certainty and keep us on the path to greater prosperity.” But his opponent for the White House, Sen. John Kerry, D-Mass., backed it as well.
“Millions of American families are being squeezed by the weak Bush economy, falling incomes and rising health costs, and we should extend middle-class tax breaks to help them,” Kerry said in a statement.
The legislation extends the $1,000-per-child tax credit, rather than letting it slip back to $700 next year. It extends tax breaks for married couples that otherwise also would have been trimmed in 2005. And it prevents the 10 percent income tax bracket from being applied to smaller amounts of earned income, as it was in the past. To hold down the cost of last year’s $350 billion tax cut, Republican tax writers decided those measures would expire at the end of 2004, knowing they almost certainly would be extended in an election year.
The new tax bill also would prevent a dramatic rise in the alternative minimum tax, a parallel income tax system designed to tax the wealthy but that is increasingly hitting the middle class. The bill’s $22.6 billion AMT “fix” would last only one year.
A recent analysis by the accounting firm Deloitte Tax LLP concluded that middle income taxpayers would see a “sizable percentage hike in taxes” if the cuts are not extended. A family of four earning $63,000 would see their taxes rise by $700 – or 27 percent, primarily because their child credit would shrivel. A more affluent family of four earning $150,000 would see taxes rise by $1,800, or 8.5 percent of their total federal tax payment, mainly due to their lost marriage tax break and the rising AMT hit.
The bill also extends for one year a variety of business tax breaks – from wind energy credits to corporate research deductions – at a cost to the Treasury of $13 billion.
Democrats did have their complaints. They failed to make changes to the child credit that would have prevented some poor families from losing some or all of their child tax payments as inflation eats away at their eligibility. And they fumed that Republicans extended most of the tax cuts for five years but chose to extend for two years a provision benefiting soldiers in the combat zones of Iraq and Afghanistan.
But the core of the bill proved irresistible.
“Who would contest these types of things?” asked Rep. Charles Rangel, D-N.Y., the ranking Democrat on the House Ways and Means Committee.
The latest tax cut would ensure that none of the major tax measures Bush championed in his first term would expire during his potential second term. The next Bush tax measure set to expire is last year’s deep cut to the tax rate paid on capital gains and dividends, which evaporates in 2009.
But the next president still will face two problems that tax writers have either exacerbated or procrastinated about: The record budget deficit and the alternative minimum tax. A 10-year remedy to the AMT problem could cost the government $602 billion, if all the Bush tax cuts are extended beyond their final 2010 expiration date, according to the Congressional Budget Office.
As for the budget deficit, “It’s just going to make it worse,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan budget watchdog. The bill “postpones all the hard choices on the deficit. What it shows is Congress is still not taking the deficit seriously.”
At the request of House Democrats, the CBO – Congress’s official budget scorekeeper – released new deficit projections that assumed Washington would stick to Bush’s tight controls on spending, fix the AMT, enact all of the president’s proposed tax cuts, and slowly draw down military forces in Iraq and Afghanistan. Under that scenario, this year’s $422 billion deficit would dip to $353 billion in 2005 and $312 billion in 2006, before slowly rising to $439 billion in 2014. Over that decade, the amount of government debt held by the public would nearly double, to $8 trillion, from $4.3 trillion today.
The president would not come close to meeting his pledge to cut the budget deficit in half in five years, according to the estimates.
Democrats did offer procedural motions to instruct tax writers to offset the cost of the tax cut by raising taxes on millionaires, but they were struck down along party lines. Ultimately, few would vote against an election year bill to prevent tax increases on middle-class families.
“This is political,” said House Minority Leader Nancy Pelosi, D-Calif. “My advice to my colleagues is when they are dealing politically on the floor, you deal with it any way you need to deal with it.”