Congress Reaches Agreement On Extending Bush Tax Cuts

by Mike Godfrey, Tax-News.com, Washington

04 May 2006

Congressional Republicans have agreed in principle to a $70 billion package of tax cuts which includes extensions to President George W. Bush's cherished investment tax cuts for an additional two years, while also providing for a stop-gap measure to thwart the growing reach of the Alternative Minimum Tax.

The agreement, reached among the Republican members of a joint House-Senate conference committee, would ensure that the 15% tax rate on most capital gains and qualifying dividends will continue until the end of 2010. Under current legislation, these tax cuts are due to expire at the end of 2008.

President Bush has been stepping up the pressure on Congress to include the tax cut extensions in the tax reconciliation bill by warning that lawmakers stand to preside over an effective tax increase that would be devastating for the US economy.

The bill has been bogged down in Congress for months as House and Senate lawmakers differed over the composition of the bill; while the House approved a $56.1 billion package which included the investment tax cuts, the Senate bill omitted the tax cut extensions in favour of a one year fix to the AMT.

Without any change in the tax law, the number of taxpayers subject to the AMT would increase by 20.4 million (from 5.5 million in 2005 to 25.9 million in 2006). However, the Administration has stated its intention to find a longer-term solution to the AMT problem within the context of "fundamental tax reform".

Also included in the agreement are important provisions that would extend a tax holiday on the foreign trading profits of financial services firms until the income is repatriated, and allow small businesses to continue to write off investments worth up to $100,000 through 2008 and 2009.

However, Congressional aides have revealed that the agreement cannot come to a vote until House and Senate negotiators agree on a second piece of legislation containing many of the proposed tax breaks left out of the compromise, such as the popular R&D tax credit.

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