Republicans in Congress Move to Extend $69 Bln in U.S. Tax Cuts
By: Administrative Account | Source: Bloomberg
May 10, 2006 6:11AM EST

May 10 (Bloomberg) -- Congressional Republicans, saying investors need certainty in tax policy, agreed to extend about $69 billion in tax cuts, including low rates on dividends and most capital gains. Lawmakers said they were near agreement on a second measure that would extend as much as $30 billion in tax breaks, including a lapsed research credit that has benefited companies such as Chicago-based Boeing Co. and Dow Chemical Co., based in Midland, Michigan. The agreement on the $69 billion measure, a centerpiece of President George W. Bush's agenda, may end a deadlock of almost five months. The House of Representatives plans to vote today on the plan to spare more than 15 million U.S. households a tax boost from the alternative minimum tax and extend low tax rates on dividends and most capital gains from 2008 until 2010. The two-year extension is ``going to encourage investment when people know what the tax policy of our country is for a longer period of time,'' Senate Finance Committee Chairman Charles Grassley said in an interview yesterday. Lawmakers will reach agreement on the second tax measure, containing the research credit, ``very shortly,'' Grassley said. The credit, available to as many as 16,000 companies, is worth $10 billion a year. Tax Breaks The $69 billion measure combines measures passed by the House and Senate. The $56.1 billion House measure included the two-year extension of the tax breaks on investments; the Senate approved a provision that limits the reach of the alternative minimum tax, a levy that has increasingly affected middle-income households. The legislation also would extend a tax break for companies such as Fairfield, Connecticut-based General Electric Co. and New York-based Citigroup Inc. that generate profits from financial services outside the U.S. That tax break is due to expire at the end of the year. The Senate may vote this week on the measures. The 17 provisions in the $69 billion legislation require only a majority vote to pass the Senate under budget rules. The research-credit legislation, which Grassley said would cost $20 billion to $30 billion, would require 60 votes to pass. Montana Senator Max Baucus, the top Democrat on the Finance Committee, said the decision to renew the research credit and other expired tax breaks in separate legislation puts them in peril. ``A different tax vehicle has a high likelihood of breaking down,'' he said. `Wrong Judgment' Democrats and some Republicans said they opposed the agreement. Senator Jack Reed, a Democrat from Rhode Island, said continuing the tax cuts would add to a federal budget deficit that the Bush administration projects will reach $423 billion this year, up from $319 billion in fiscal 2005. ``It's the wrong judgment to provide further problems for the deficit by extending the tax breaks for dividends and other issues,'' Reed said in an interview. Senator George Voinovich, an Ohio Republican, said he opposes the tax cuts in part because the national debt has increased 50 percent since he took office in 1999. ``We have an unbelievable crisis in our finances and we're talking about doing this at this time,'' Voinovich said. ``It doesn't make sense.'' If passed, the legislation would prevent rates on most capital gains from increasing at the end of 2008 to 20 percent; dividends would be taxed at ordinary income tax rates as high as 35 percent. Dividends and most capital gains currently are taxed at 15 percent. ``I'm pleased to see that investors can now plan on those lower rates for the coming years,'' Treasury Secretary John Snow said. Small Business Expenses The legislation also would extend an increase in the amount of expenses small businesses can write off in a single year rather than depreciate over time. The legislation also ensures the first $62,550 of a household's income will be exempted from the alternative minimum tax, a step necessary to prevent a $31 billion tax increase on 16 million families this year. The alternative minimum tax was created in 1969 to prevent 155 wealthy people from reducing their tax liability with excessive exemptions, credits, and other deductions. Because the tax was never indexed for inflation, it increasingly is affecting more people as their incomes rise. It ensnares large families and those who live in high-tax states because breaks for children and state and local taxes are disallowed under the AMT. Roth IRAs Under the legislation, wealthy investors will win an opportunity in 2010 to transfer their tax-deferred individual retirement accounts into Roth IRAs, allowing them to pay tax on investment gains now and escape taxes on future gains. Currently, Roth IRAS are available only to households earning less than $160,000 a year. The research credit, which had been law since 1981, has been renewed more than a dozen times before expiring Jan. 1. According to a 2004 study by the accounting firm Ernst & Young LLP, as many as 16,000 companies annually claim the credit, which is offered only to companies that regularly increase their research spending. The new legislation would make it easier for companies such as Detroit-based General Motors Corp. to claim the credit. Companies such as GM have had difficulty receiving the credit because their income from financial services outpaced their manufacturing income. The second tax measure also would renew a work opportunity tax credit used by companies that hire former welfare recipients; such companies include Bentonville, Arkansas-based Wal-Mart Stores Inc., the world's largest retailer, and Orlando, Florida- based Darden Restaurants Inc., operator of Red Lobster restaurants. Other provisions in the second tax measure would renew tax deductions for teachers who buy their own classroom supplies and a tax deduction for state and local sales taxes that is worth more than $2 billion a year to residents of states with no income tax such as Texas, Alaska, Florida, and Tennessee.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net. Last Updated: May 10, 2006 00:15 EDT