WASHINGTON - Capping a week of frenzied negotiations, Congress approved a $350 billion package of tax cuts and state aid yesterday, handing President Bush a victory on his top domestic priority but failing to deliver the much larger measure he wanted.
The final bill contains most of the elements Bush had asked for to invigorate the sluggish economy: It cuts marginal income tax rates, slashes taxes on investors' dividends and capital gains, and provides tax breaks on business investments.
But the 10-year package - the third tax cut of the Bush presidency - was shrunk to a size that could pass the closely divided Senate. By the slimmest of margins, 51-50, the Senate approved the bill yesterday, with Vice President Dick Cheney casting a tie-breaking vote. Earlier, just before 2 a.m., the House approved the bill, 231 to 200.
The resulting measure, which Bush has said he will sign into law, left some Republican leaders determined to pursue further tax cuts.
"You will see continued efforts on behalf of our caucus for more tax relief for the American people," said Senate Majority Leader Bill Frist of Tennessee.
Republicans said the package, even in its diminished form, would give the economy a quick burst of energy by helping the stock market, encouraging people and businesses to invest, and creating jobs. The $350 billion bill includes $20 billion for states, many of which are struggling with budget deficits and have had to cut services and raise taxes.
Americans will begin feeling the benefits of the measure as early as July, when about 25 million families will begin receiving checks of up to $400 per child and employers will start withholding less money from paychecks as a result of lower individual income tax rates.
"It's a real victory to answer the question of the economic anxiety that people have right now," said Sen. Charles E. Grassley, an Iowa Republican and chairman of the Finance Committee.
Many Democrats, though, denounced the tax cuts as the height of fiscal irresponsibility and economic injustice. They argued that the bill would widen the federal budget deficit - already a record high - and increase the national debt. Democrats also say the tax cuts will disproportionately aid wealthier taxpayers, investors and businesses.
An analysis by the Tax Policy Center, a research group run by the Brookings Institution and the Urban Institute, concluded that the top 1 percent of taxpayers would receive 29 percent of the tax benefits, more than the bottom 80 percent combined.
"By promoting his unnecessary, unfair and fiscally unsound tax cut, President Bush created a tax-cutting frenzy among congressional Republicans," said Rep. Nancy Pelosi of California, the Democratic leader in the House, who called the measure a "tragedy."
Democrats and some moderate Republicans, along with budget analysts who are calculating the effects of the bill, say the package will ultimately prove far more costly than projected - perhaps up to $1 trillion.
That's because most of the provisions are scheduled to expire after a few years. Critics have called this a "yo-yo" gimmick that lawmakers used to restrain the cost of the package. Most lawmakers and analysts say Congress will almost surely vote to extend the tax cuts before they expire.
"This is a trillion-dollar tax cut masquerading as $350 billion," said Sen. Olympia J. Snowe, a Maine Republican who joined other moderates in insisting that the package total no more than $350 billion because of their concerns about the growing budget deficit.
"This bill shortchanges some of the most stimulative aspects with artificial `sunsets' that could only lead to larger federal deficits," said Snowe, one of three Republicans to vote against the measure.
Congressional analysts project that the budget deficit this year could reach $400 billion, the largest ever.
But the long-term concerns were brushed aside yesterday by Republican leaders, who focused on the benefits that they said the package would produce within a couple of months. Congressional aides estimated that the measure would pour about $210 billion into the economy over the next two years.
The bill immediately enacts across-the-board income tax-rate cuts that had been scheduled to take effect in 2006. It raises, from $600 to $1,000, the per-child tax credit. The bill also curtails the "marriage-penalty," a quirk of the tax code that causes some married couples to pay more than if they were single and filed separately.
Both the child-credit increase and the provision to ease the marriage penalty are set to expire at the end of next year. The other major element of the package would reduce taxes on capital gains and on dividends paid by shareholders.
The highest tax rate on dividends, now 38.6 percent, and the capital gains rate, now 20 percent, will both fall to 15 percent. For lower-income people, the rates on dividends, now up to 15 percent, and on capital gains, now 10 percent, will fall to 5 percent until 2008, when they will drop to zero.