Senate GOP backs Bush's dividend tax cuts

WASHINGTON -- The chairman of the Senate Finance Committee said Monday he will draft a bill to reduce taxes on dividends paid to corporate shareholders.

The decision by Sen. Charles Grassley, R-Iowa, moves the GOP-led Senate a step closer to supporting the centerpiece of President Bush's tax cut, although the president's position would eliminate taxes on dividends altogether.

"We're going to have a very aggressive dividend part of our package tomorrow," Grassley said on CNN's "Moneyline." "And it won't be exactly the way the president had it, but I think it will be very, very aggressive and will send a strong signal that we in the majority party feel that there's a great deal of anxiety about the economy."

Sen. Trent Lott, R-Miss., said after a meeting of Senate Republicans that lawmakers want the provisions in the bill from the beginning, believing its chance of survival would drop dramatically if the committee doesn't find a way to squeeze it in.

'That's the main point'

"The dividend has to be in there," Lott said. "That's the main point, and I think the chairman heard that clearly."

Bush pushed for the elimination of taxes on dividends as part of a $726 billion tax cut over the coming decade aimed a stimulating the economy. The Senate slashed the tax cut back to $350 billion, forcing Senate tax writers to find a way to rewrite the dividend policy for much less than the $400 billion version designed by the White House.

Grassley plans to disclose his version of the legislation Tuesday. Most Republicans on his committee support the dividend plan, but moderate Sen. Olympia Snowe, R-Maine, remains undecided.

GOP leaders and the president's conservative allies in the Senate want to reduce the dividend tax to zero, even if the policy has to be phased in slowly and ended prematurely, called "sunsetting," to reduce the cost to the Treasury. The idea may have too little support to survive committee debate, said GOP aides trying to count votes.

"I would assume that it would be an expensive proposition, and sunsetting I think, again, it could be viewed as a gimmick in this process," Snowe said.

Republicans may opt instead to allow taxpayers to exclude from taxation half their dividends, which currently are taxed as earned income at rates as high as 38.6 percent. Some moderates, including Snowe, favor giving taxpayers $1,500 in tax-free dividends.

The party also breaks over whether to grant help to financially strapped states, including money for Medicaid. Snowe and Gordon Smith, R-Ore., want the bill to include $20 billion in aid.

Senate Democrats planned to bring out their economic growth plan on Tuesday as well. The plan includes tax relief for workers, parents and married couples, as well as extended unemployment assistance for those who have exhausted their jobless benefits. Democrats also intend to propose roughly $40 billion in aid to states and local governments, according to sources who spoke on condition of anonymity.

The Democratic proposal will include a one-time tax cut of $300 per child for up to two children in a family, as well as a one-time tax credit per worker of $300, these officials said.

Additionally, the child tax credit, currently $600, would rise to $700 in 2003 and $800 in 2004. Other elements of the plan provide relief from the so-called marriage penalty, both for low-wage earners and for couples that use the standard deduction to calculate their taxes.

Overall, the plan is expected to cost $185 billion over the next 10 years, offset by roughly $35 billion in revenues generated by higher customs fees and closing tax loopholes claimed by companies doing business offshore.

House tax writers decided last week to reformulate the dividend tax cut to give the benefits to a broader range of investors. The full House Ways and Means Committee will debate the bill Tuesday.

Committee Chairman Bill Thomas, R-Calif., decided to consider dividends in the same category as capital gains, which are taxed at a lower rate. He wants to reduce taxes on both types of investment income to 15 percent, and 5 percent for low-income individuals.

Republicans have very few differences over the basic elements of the president's tax cut, and both the House and Senate bills include versions of those elements. Both bills accelerate income tax cuts planned for future years, increase the child tax credit to $1,000 from $600 and increase the standard deduction for some married couples. Both bills also allow small businesses to expense up to $75,000 in investments.