Senators approve tax-cut bill, clearing it for Bush signature

WASHINGTON -- Congress has completed the first move in an election-year tax-cutting two-step.

But now, having extended lower tax rates for investors, lawmakers hope to not stumble in the next step of the dance -- passing another bill to give tax breaks for college tuition and to teachers who buy pencils and crayons for their students.

The $70 billion tax cut package awarded final approval by the Senate will extend lower rates for investors and also save billions for families with above-average incomes.

Republicans promised the bill will produce economic gains for the nation -- and hoped it would give a much-needed political boost to President Bush and the GOP-controlled Congress.

But Democrats said their GOP rivals had blundered by rushing ahead with tax cuts for investors while letting languish a second bill to provide a variety of popular but expired tax breaks on college tuition and state and local sales taxes, as well as a research and development tax credit for businesses.

Thursday's bill passed the Senate by a 54-44 vote, and Bush is expected to sign it next week.

"It is true that this conference report made tough choices," said Max Baucus, D-Mont. "Those choices were tough on teachers, tough on families, tough on businesses. Hopefully their relief will be coming soon."

The legislation on its way to Bush provides a two-year extension of the reduced 15 percent tax rate for capital gains and dividends, set to expire at the end of 2008.

It also will extend for one year recent changes to the alternative minimum tax to prevent it from hitting more upper middle-income families.

The AMT was designed to hit the most wealthy, but it is now common for taxpayers, especially those with families in high-tax states, to pay the AMT on incomes of $100,000 and more.

Thursday's debate followed partisan lines, with Republicans eagerly crediting the tax cuts, first enacted in 2003, with a surging economy, millions of new jobs and booming tax revenues. Democrats overwhelmingly opposed the bill, saying its tax cuts on capital gains and dividends will flow mostly to wealthy.

Just three Republicans -- Olympia J. Snowe of Maine, Lincoln Chafee of Rhode Island and George Voinovich of Ohio -- voted against the bill. Democrats Ben Nelson of Nebraska, Bill Nelson of Florida and Mark Pryor of Arkansas voted in favor.

Republicans said to fail to extend the tax cuts would amount to a tax increase on investors, big and small, as well as on families facing the alternative minimum tax. They've dubbed the bill the "Tax Increase Prevention Act."

"Are we going to increase taxes on well over 100 million people ... or are we going to keep taxes low?" said Majority Leader Bill Frist, R-Tenn.

They blasted GOP negotiators for dropping a Senate-passed provision that would have closed an inventory accounting practice known as "last in, first out" that is used by oil companies and other businesses to help lower their tax burden.

"The Bush administration and the Republican leadership are far more interested in helping their wealthiest friends than hardworking, middle-class Americans," said Charles Schumer, D-N.Y. "The GOP made its choice, and they chose millionaire investors and oil companies over middle class families."

But passage of the bill is the first step of a two-track strategy for advancing the GOP's election-year tax cut agenda. Finance Chairman Charles Grassley, R-Iowa, said again Thursday that another bill containing widely backed tax cuts favored by Democrats would advance soon as part of a follow-up bill.

The first measure focused on investor tax breaks and alternative minimum tax relief and it can advance under special rules blocking Senate Democrats from filibustering it to death. Grassley said the later bill would contain about $22-23 billion in tax breaks backed by Republicans and Democrats.

Those include preserving tax deductions for state and local sales taxes, a tuition tax deduction, a tax break for teachers who buy their own school supplies, and the R & D tax credit for businesses.

The bill also will extend for two years provisions sought by small businesses to let them write off up to $100,000 in investments in equipment.

Meanwhile, economists said the 2003 cuts on investments and other pro-business incentives have had a positive impact on the economy, though not as much as claimed by Washington policymakers.

"The evidence so far suggests they've had a small positive impact on stock values and by extension the broader economy," said Mark Zandi, chief economist for Moody's Economy.com. "But a very modest positive impact. ... It's strong enough to argue that these tax cuts should be made permanent."