Senate panel drops tax-cut extension

WASHINGTON – Senate tax writers dropped an effort Tuesday to extend one of the tax cuts President Bush strongly supports, underscoring a growing rift in the Republican-controlled Congress over spending and tax cuts.

The Senate Finance Committee left out of a $60 billion tax-cut measure an extension of a dividend and capital gains tax cut due to expire at the end of 2008.

The action sets up a likely showdown with the House. GOP leaders there support extending the lower tax rate for income derived from investment profits, approved as part of Bush’s 2003 tax cuts.

It was the latest dispute within the Republican ranks, as lawmakers, looking to their own re-election campaigns, break from the president as his ratings slide. In the House, a budget-cutting bill has been hung up by an internal GOP fight.

The tax bill could reach the Senate floor as early as today. An effort is expected to be made to rescind tax breaks provided to the oil industry – a response to the public furor over the record oil industry profits when gasoline prices are high. But many Republicans object that rescinding energy tax breaks would discourage new energy production.

The package that the committee approved would extend several expiring tax cuts, including a research tax credit. It would provide new tax cuts to encourage business investment in the hurricane-battered Gulf Coast.

Sen. Olympia Snowe, a Republican from Maine, infuriated conservative colleagues by supporting Democrats’ objections to extending the dividend and capital gains tax cut when the government faces budget deficits and massive costs for the war in Iraq and post-Katrina reconstruction. A one-year extension would cost about $10 billion. “It’s not a question of whether or not we support tax cuts,” Snowe said. “It really is a question of what we can afford to do now.”

Democrats said the tax cuts would disproportionately benefit upper-income taxpayers while Congress considers cutting spending for programs that serve the poor. Most Republicans have portrayed the tax cuts as critical to promoting economic growth.

A number of conservative senators vowed to fight to include the dividend and capital gains tax-cut extension in whatever bill emerges from a compromise with the House.