Tax cuts advance in House

Measure passed to limit number of people affected by alternative minimum tax


WASHINGTON -- In a year-end push to show voters they are tending to the nation's economic health, House members launched a tax-cutting spree yesterday that could culminate with passage of measures to extend capital gains and dividend tax reductions today.

The House overwhelmingly passed two bills to limit the number of people who pay the alternative minimum tax and to treat combat pay as earned income under the earned income tax credit.

But the tax cuts could pose a political problem for Republicans as they struggle to bat away allegations of corruption and questions about their competence controlling the levers of government. The federal response to Hurricane Katrina damaged voters' perception of the Bush administration, and the war in Iraq has made the situation worse.

House Republicans are trying to curb federal spending while passing tax cuts worth billions of dollars. Those spending cuts would limit college loans, food stamps and health care for the poor. The wealthiest Americans, however, would benefit from the multibillion-dollar extension of capital gains and dividend cuts from 2008 to 2010.

Under the House plan, taxpayers who earn more than $1 million a year would receive more than 50 percent of the capital gains and dividends tax break. People who make more than $200,000 a year would receive 80 percent of the capital gains and dividend tax cuts.

Still, it is unclear whether Republicans, who control the House and the Senate, will be able to agree before the year's end on which of the billion-dollar provisions should become law. The Senate did not include the capital gains or dividend provisions in its tax-cutting bill.

House Republicans say it is essential for them to immediately show voters they are reining in federal spending and boosting the economy through tax cuts. In recent days they have complained to senior White House officials that the Bush administration has done a poor job promoting good news about the economy.

Democrats, however, complain that Republicans are not helping ordinary Americans who do not earn hundreds of thousands of dollars a year.

Rep. Jan Schakowsky, an Illinois Democrat, said, "The president seems mystified as to why average Americans aren't praising the economic outlook right now and the answer is simple. They have not felt it."

Budget analysts say the House legislation to cut spending and taxes would not do anything to reduce the deficit because the cost of the tax cuts outweighs the spending reductions, both of which have been moving on separate legislative tracks.

House Republicans are still discussing the possibility of a 2 percent across-the-board spending reduction. The Senate took a substantially different approach to its primary tax and spending measure.

Rather than extending capital gains and dividend tax cuts, the Senate provided taxpayers with one year of relief from the alternative minimum tax, which was originally designed to prevent the wealthiest Americans from taking so many tax deductions that they paid no taxes at all. In recent years, a growing number of middle-income taxpayers have been ensnared by the law, substantially boosting their annual tax bills.

According to the Urban Institute-Brookings Institution Tax Policy Center, about 29 million people would be subject to the alternative minimum tax by 2010, compared with 3 million today and just 1 million in 1999.

The cost of keeping the alternative minimum tax from affecting new taxpayers for a year is about $30 billion. The House voted 414-4 yesterday to give that relief in a stand-alone bill.

Jill Zuckman writes for the Chicago Tribune.

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