$70 Billion Tax Package Awaits Bush's Signature

by Mike Godfrey, Tax-News.com, Washington

15 May 2006

The much debated $70 billion tax reconciliation bill that will extend investment tax cuts and Alternative Minimum Tax relief has finally cleared Congress and now awaits the signature of President George W. Bush.

"We're finally here. We have a deal," Sen. Charles Grassley, chairman of the Senate Finance Committee declared on Thursday after the chamber approved the tax package in a 54-44 vote, split largely along party lines. The bill had already been approved by House lawmakers, following an earlier agreement by Congressional negotiators. However, the legislation has been many months in the making, as Republicans struggled to unite behind the proposals, fearing a growing federal deficit.

The tax bill will extend the life of the 15 percent rate of tax on most capital gains and qualifying dividends for two years until the end of 2010, preventing a tax increase at the start of 2009. The rate will be reduced to zero in 2008 for taxpayers in the 10- and 15-percent tax brackets. These proposals are expected to cost $20.551 billion over 5 years and $50.783 billion over 10 years.

Alternative Minimum Tax provisions extend the exemption levels though the end of 2006 but at a higher level - $62,550 (married) and $42,500 (other). The proposal is expected to cost $31.047 billion over 5 years.

Other key provisions include: increased expensing for small business allowing small firms to expense $100,000 (from $25,000) through 2009, expected to cost $7.274 billion over 5 years; and exception under subpart F for active financing and insurance income extended for two years, until the end of 2008 costing an expected $4.796 billion over 5 years.

In addition, Senate Majority Leader Bill Frist secured two provisions in the legislation increasing the tax code’s fairness for songwriters. The first allows songwriters to claim the capital gains tax rate on music sales and will reduce songwriters’ taxes by up to 35 percent. Individual songwriters can pay up to 50 percent in income and self-employment taxes on their music under current law, while their corporate partners just pay 15 percent in capital gains taxes.

The second songwriter provision simplifies the accounting process for advances paid to songwriters. Songwriting advances can now be calculated according to a straight-line, three-year depreciation schedule.

"I applaud the Senate for passing important tax relief that will help keep our economy strong and growing," commented President Bush, who for many weeks has been pressuring lawmakers to arrive at a deal which included the investment tax cuts, despite their cost in terms of revenues.

"This legislation prevents an enormous tax hike that the American people do not want and would not welcome. The bill will extend policies that have helped our economy flourish," he added.

Bush added that his tax policies have led to 18 straight quarters of growth, including 4.8 percent growth in the last quarter.

However, critics of the legislation contend that the tax cuts benefit only a relatively small number of wealthy people and provide very little in meaningful tax relief for low and middle income workers. What's more, some provisions that would have helped business investment, such as an extended R&D tax credit, had to be left out.

“Despite $70 billion spent on tax cuts in this bill, millions of teachers, families with kids in college, and businesses that want to conduct important research or hire the hard-to-employ will not see one dollar of the benefits handed out today," commented Sen. Max Baucus, ranking Democrat on the Finance Committee.

“This bill made the wrong choices – putting 2009 tax cuts before 2006 tax cuts, and putting ideological ‘wants’ before Americans’ real needs," he argued.

Nonetheless, it is hoped that an extra $30 billion in expired tax breaks will be approved in a separate tax package currently being negotiated by House and Senate leaders.

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