Tax cuts to show in rebates, paychecks

WASHINGTON -- By the narrowest of margins, Congress on Friday sent President Bush the third tax cut of his presidency -- a $330 billion package of rebates and lower rates for families and new breaks for businesses and investors.

Republicans said it would put people back to work. Democrats derided it as a gift to the wealthy.

Vice President Dick Cheney's ballot broke a tie in the GOP-controlled Senate, which sent it to Bush on a 51-50 vote after the House passed it by a more comfortable 231-200 margin earlier Friday.

President Bush, hailing the legislation's passage and promising to sign it next week, said 136 million taxpayers would benefit directly. "Congress has taken a major step forward in the effort to boost economic growth and create jobs," Bush said.

Other Republicans praised the new tax cuts and an accompanying $20 billion in new aid to states as the best way to restore vitality to a sluggish recovery that continues to produce net job losses month after month.

"Economists tell me that the economy is like a great ship. It cannot be turned around quickly," said Senate Majority Leader Bill Frist, R-Tenn. "While this economy need not necessarily be turned around -- it is headed in the right direction of growth -- it needs to pick up its pace."

The bill aims to uncork pent-up consumer demand and investment potential by releasing $60 billion into the economy over the next four months and another $149 billion over the next year.

Financially strapped states, many raising taxes and cutting services to balance their budgets, will get $20 billion over the next two years to relieve the fiscal pressure. Half of that money will be dedicated to Medicaid. "These moneys will help governors continue to provide essential and critical services to our citizens," said Kentucky Gov. Paul E. Patton, the Democratic chairman of the National Governors Association.

To drive business investment, small enterprises will be able to immediately write off $100,000 in new equipment purchases and all businesses will be able to expense half their investments this year.

Back in time

Personal tax cuts reach back to Jan. 1. As a result, employees will see fatter paychecks during the last half the year, and many parents will get an advance refund worth up to $400 per child later this summer.

Married couples who pay higher taxes than they would if filing as two single taxpayers will see some of that "marriage penalty" disappear, as their standard deduction and tax brackets broaden.

Investors will see the tax rates on their earnings drop, as the top rates on dividends and capital gains fall to 15 percent. Dividends are currently taxed like ordinary income at rates as high as 38.6 percent, and capital gains at 20 percent. Under the new rates, low-income taxpayers would pay 5 percent tax, and see the tax disappear altogether in 2008 but return to current rates the following year.

The change to income tax rates will last through 2011, but other cuts will be for a much shorter span unless Congress acts to extend them. "This tax cut is one big yo-yo," said Sen. Max Baucus, D-Mont. "Now you see it, now you don't."

Most Democrats opposed the tax cuts from the beginning, saying the country would benefit more if Congress instead boosted consumer spending from the bottom rungs on the income ladder by giving employees and employers a temporary holiday from Social Security and Medicare taxes. They said the GOP bill instead offers immediate gratification but future danger.

"It is a shameful looting of the federal Treasury by the rich and powerful of America, compliments of their friends in Congress," said Mark Dayton, D-Minn.

Republican leaders indicated they want to extend the bill's many temporary tax cuts in future years. "We will have plenty of time to discover if these tax cuts are popular enough to extend," said House Speaker Dennis Hastert, R-Ill. "My guess is they will be."

Senate Finance Committee Chairman Charles Grassley, R-Neb., predicted lawmakers will vote before the 2004 election to extend at least the larger child credit and "marriage penalty" provisions.

"Beyond that, I think you have to look down the road," Grassley said of extending other cuts set for expiration in coming years. "I don't think Congress can go back to the country and say we're going to have the biggest tax increase in history."

Four months of debate exposed divisions among Republicans and showed some unwilling to follow Bush's blueprint for dramatic tax cuts at the cost of ballooning deficits. The Senate's moderate Republicans wielded extraordinary power to throw the balance of votes in the narrowly split chamber, and Cheney's appearance Friday marked the third time this year he had to break a Senate tie over budget and tax decisions.

Moderate Republicans John McCain of Arizona, Olympia Snowe of Maine and Lincoln Chafee of Rhode Island opposed the bill; Democratic Sens. Zell Miller of Georgia and Ben Nelson of Nebraska supported it.

The pressure of growing deficits forced lawmakers to shrink the pricetag on the final package from $726 billion to $330 billion, but lawmakers nevertheless squeezed most of the elements in by artificially ending the cuts in the next few years.

"This is a trillion-dollar tax cut masquerading as $350 billion," said Sen. Olympia Snowe, R-Maine, one of the moderates who forced Congress to halve the president's tax cut plan. "This tax cut may grow deficits to levels economists fear will be unsustainable."

The Senate passed the tax cut the same day they voted to add nearly $1 trillion to the nation's debt limit, less than a week before the Treasury Department expected to run out of borrowing authority and risk default on the nation's debt.