WASHINGTON - House and Senate Republican leaders struck a deal yesterday on a $350 billion measure that would reduce taxes on dividends and capital gains through 2008. The deal was reached as lawmakers raced to complete the tax-cut measure before leaving tomorrow for a weeklong break.
"We have an arrangement," said Senate Majority Leader Bill Frist, a Tennessee Republican. "We do have 50 votes" in support of the package.
The House could pass the measure as early as today, and the Senate will likely follow suit tomorrow, sending it to President Bush.
The bill's passage would be a victory of sorts for Bush, who has made tax cuts the heart of his domestic policy. He argues that slashing taxes would energize the sputtering economy, create jobs and help dry up the river of red ink that is plaguing the federal budget.
Still, the agreement contains only a fraction of the $726 billion in tax cuts that Bush had originally called for. It stops well short of achieving his principal goal: the elimination of the tax that shareholders pay on corporate dividends.
Taxpayers could begin seeing the effects of the measure, which also lowers individual income tax rates, as early as this summer, aides said.
The deal reflects a version of the dividend tax cut that conservatives had devised and included in the $550 billion tax-cut bill passed by the House. The top tax rate on dividends, now 38.6 percent, and on capital gains, now 20 percent, would fall to 15 percent through 2008. In 2009, the tax rates would revert to their current levels.
For lower-income individuals, who now pay a 10 percent tax rate on capital gains and up to 15 percent on dividends, both rates would fall to 5 percent. In 2008, the taxes would be wiped out altogether. But beginning in 2009, the rates would return to their present levels.
The measure also would reduce individual income tax rates across the board and give businesses tax incentives to buy equipment. It would raise, from $600 to $1,000, the child tax credit and change elements of the tax code that penalize married couples. Those provisions would end in 2004.
A compromise
The deal represents a compromise among House and Senate conservatives who are pushing for deep tax cuts, a handful of Senate moderates who are advocating aid to the states, and centrists in both parties who insisted on holding the cost of the package to $350 billion over 10 years.
"The stimulative effect is equivalent to any of the bills that have been proposed to date," Frist said.
A top Frist aide, Eric Ueland, said of the package: "There's a heavy emphasis on trying to get as much out the door as possible" to spark growth in the economy.
The final outlines emerged last night after Republican leaders bowed to the moderates' wishes and scaled back the tax cuts to about $316 billion to make room for $20 billion in Medicaid and other aid to the states and a $14 billion provision that allows people who do not earn enough to owe income taxes to receive a $1,000 per-child tax credit.
A spokesman for Sen. George V. Voinovich, a moderate Ohio Republican whose support was seen as crucial to any deal, suggested that he was likely to support the package.
In a meeting yesterday with Vice President Dick Cheney and Rep. Bill Thomas, the California Republican who chairs the House Ways and Means Committee, Voinovich made clear that that he would oppose any package exceeding $350 billion - even if the excess was for spending - unless tax or fee increases were included to make up the difference.
The three agreed to a framework that would accomplish that, said Scott Milburn, the Voinovich spokesman.
"We're waiting for the fine print," Milburn said. "If the details comport with the verbal agreement, we'll be there."
Hoping to cut taxes more deeply, Senate leaders had proposed including a Customs user fee increase and other small tax boosts to pay for a package totaling $383 billion. But House negotiators balked at that idea.
Senate Republicans, who preferred to wipe out, rather than reduce, the tax on corporate dividends - even if only temporarily - grudgingly agreed to the House approach. But House leaders suggested that their willingness to chop their version - which began at $726 billion, the level Bush had requested and then fell to $550 billion - to the Senate's $350 billion level was a major concession.
"It was done according to the numbers and the requirements of the Senate," Thomas said of the agreement. "They dictated the size of the package and the structure of the package."
Gathering votes
The agreement was, in part, a result of efforts waged by Cheney, who spent the afternoon in his Capitol Hill hideaway yesterday making phone calls and holding meetings to try to pull together enough votes in the closely divided Senate.
Indeed, it was the political dynamic of the Senate - with its narrow 51-49 Republican edge and handful of swing votes in both parties - that defined the final deal.
