WASHINGTON – With a year-end push to show voters they are tending to the nation’s economic health, the House launched a tax-cutting spree Wednesday that could culminate with its passage of measures to extend capital gains and dividend tax reductions today. The House overwhelmingly passed three bills to limit the number of people who pay the alternative minimum tax, to provide tax incentives for investment in hurricane-ravaged Louisiana, Mississippi and Alabama, and to treat combat pay as earned income under the earned income tax credit.
But the tax cuts could pose a political problem for Republicans as they struggle to bat away allegations of corruption and questions about their competence controlling the levers of government. The federal response to Hurricane Katrina damaged voters’ perception of the Bush administration, and the war in Iraq has only made the situation worse.
Now, House Republicans are trying to curb federal spending while passing tax cuts worth billions of dollars. Those spending cuts would limit college loans, food stamps and health care for the poor. The wealthiest Americans, on the other hand, would benefit from the multibillion-dollar extension of capital gains and dividend cuts from 2008 to 2010.
Under the House plan, taxpayers who earn more than $1 million a year would receive more than 50 percent of the capital gains and dividends tax break. People who make more than $200,000 a year would receive 80 percent of the capital gains and dividend tax cuts.
Still, it is unclear whether Republicans, who control the House and the Senate, will be able to agree before the year’s end on which of the billion-dollar provisions should become law. The Senate did not include the capital gains or dividend provisions in its tax-cutting bill.
House Republicans say it is essential for them to immediately show voters they are reining in federal spending and boosting the economy through tax cuts. In recent days they have complained to senior White House officials that the Bush administration has done a poor job touting good news about the economy.
“We want people to understand we’re putting our fiscal house in order,” said Rep. Jeff Flake, R-Ariz., one of the leaders in the push for budgetary spending restraints.
Democrats, however, complain that Republicans are not helping ordinary Americans who do not earn hundreds of thousands of dollars a year.
“All that tax relief goes to increasing inequality in society,” said Rep. Barney Frank, D-Mass.
Rep. Jan Schakowsky, D-Ill., called the tax cuts “indefensible” and “immoral.”
“The president seems mystified as to why average Americans aren’t praising the economic outlook right now and the answer is simple: They have not felt it,” said Schakowsky.
Budget analysts say the House legislation to cut spending and taxes would not do anything to reduce the deficit because the cost of the tax cuts outweighs the spending reductions, both of which have been moving on separate legislative tracks.
“The general strategy is if you don’t do things all at the same time, people won’t know what you’re doing,” said Robert Greenstein, executive director of the Center on Budget and Policy Priorities.
But House Republicans are still discussing the possibility of a 2 percent across-the-board spending reduction.
“We’re still very much wanting additional restraint,” Flake said. “We’ve got to be far more dramatic than we’ve been so far.”
Still, the Senate took a substantially different approach to its primary tax and spending measure.
Rather than extending capital gains and dividend tax cuts, the Senate provided taxpayers with one year of relief from the alternative minimum tax, which was originally designed to prevent the wealthiest Americans from taking so many tax deductions that they paid no taxes at all. In recent years, however, a growing number of middle-income taxpayers have been ensnared by the law, substantially boosting their annual tax bills.
According to the Urban Institute-Brookings Institution Tax Policy Center, about 29 million people would be subject to the alternative minimum tax by 2010, compared with 3 million today and just 1 million in 1999.
The cost of keeping the alternative minimum tax from affecting new taxpayers for one year is about $30 billion. The House voted 414-4 Wednesday to give such relief in a stand-alone tax bill.
Senators also included $7 billion in Katrina-related relief in their tax bill, rather than in a separate measure as the House did. The House measure, called the Gulf Opportunity Zone, passed 415-4 on Wednesday.
The measure to treat combat pay as earned income under the earned income tax credit was part of a bill containing several minor tax provisions. It passed the House 423-0.
House Ways and Means Chairman Bill Thomas, R-Calif., said he’s not concerned that the House and Senate took different tacks, noting that it’s a common phenomenon on Capitol Hill.
“I don’t see that as an insurmountable obstacle,” Thomas said.
Meanwhile, Senate Majority Leader Bill Frist, R-Tenn., has told colleagues that he is determined to send the tax legislation to the White House before the year is out, instructing colleagues to prepare to stay in Washington until just before Christmas.
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