Republicans start shaping ideas for tax cuts, economy

WASHINGTON -- Republican leaders in Congress mended their rift Tuesday over a Senate deal earlier this month to reduce by more than half President Bush's proposed new tax cuts but discovered quickly they're far from agreement on what to do next.

In a show of solidarity, President Bush met at the White House residence Tuesday evening with Senate Majority Leader Bill Frist of Tennessee and House Speaker Dennis Hastert of Illinois. The session, which lasted one hour and 15 minutes, covered the top items on Bush's domestic agenda -- the tax cut, AIDS spending, judicial confirmations, energy legislation and Medicare revisions, White House spokeswoman Claire Buchan said.

Frist ignited a firestorm when House leaders found out that he had promised moderate Republicans the tax cut will not exceed $350 billion over the next decade. He vowed not to make the same mistake again. "It's over. I apologize. I've said I made a mistake."

House Majority Leader Tom DeLay, R-Texas, said he talked to Frist twice over the recess and feels comfortable the two chambers will get along better. "From our perspective, the Senate isn't going to go away, and we have to deal with them. ... I know we can work together and get some things done."

GOP leaders instead turned their attention to figuring out how to fit the $726 billion in tax cuts the president proposed into a much less costly piece of legislation. Republicans on the Senate Finance Committee met Tuesday to review some ideas and said they hoped to strike an agreement by the end of the week.

The largest and most debated portion of the president's plan is a $396 billion proposal to eliminate taxes that shareholders pay on corporate dividends. Democrats declared the idea dead after the Senate sliced the tax cut in half. "Dividends is basically gone. That's another day," said Sen. Max Baucus of Montana, the top Democrat on the Senate Finance Committee.

The White House insists Republicans find room for the idea in the bill. "We're working on the president's package, the whole thing," said Treasury Secretary John Snow, as he left a meeting with Frist at the Capitol.

Republican aides in the Senate said one option could exclude $1,500 in dividends from being taxed. Republican leaders prefer a more aggressive idea to exclude all dividends from taxation, beginning with 50 percent in 2003 and reaching 100 percent in 2005. That more costly option would put pressure on other parts of the bill, requiring tax writers to lower the proposed child tax credit and provide less small business expensing to make room for the dividends tax cut.

The House's chief Republican tax writer, Ways and Means Chairman Bill Thomas of California, said Tuesday he may consider leaving out a small business tax break that would increase the amount of deductible expenses from $25,000 to $75,000.

The plan is so popular it could pass on its own, Thomas said. A key lobbyist for small businesses said they might not back the bill without the expensing benefits. "Our support is in jeopardy right now," said Dena Battle, lobbyist for the National Federation of Independent Businesses.

The House and Senate differ over where to find money to offset the cost of additional tax cuts. DeLay said he prefers to cut spending. Members of the Senate Finance Committee said the revenue will have to be found in programs they control, primarily taxes and fees.

While the tax writers work out how to turn the president's signature domestic initiative into successful legislation, other senators offered their prescriptions for economic health and the items they want to see included or omitted in order to lend their support.

Sen. Trent Lott, R-Miss., said he opposes a bipartisan movement to help financially stressed states. "I'm not voting to give the states a check while they're continuing to spend profligately," he said.

Sen. Mary Landrieu, D-La., who supported Bush's 2001 tax cut, said the president should rework his plan to return payroll taxes to working individuals. "He could go on 100 trips to Louisiana, literally, and not be able to sell this," she said.

Sen. Susan Collins, R-Maine, said she will wait until new economic figures come out later this week before deciding what she can support. "I have not made a final decision on what size the tax cut should be," she said.