House And Senate Prepare To Reach Tax Cut Compromise

by Mike Godfrey, Tax-News.com, Washington

06 February 2006

The United States Senate last week approved a $70 billion tax-cutting measure without including President George W. Bush's much vaunted extension of the 15% rate on capital gains and dividends, although senior Republicans are confident that the measure will make compromise legislation yet to be agreed with the House of Representatives.

In a 66-31 vote late Thursday, Senators approved a measure that, with some minor amendments, is very similar to the bill it approved before the Christmas recess.

This measure included a one year 'fix' to the Alternative Minimum Tax designed to prevent 15 million taxpayers from falling into a system intended to prevent wealthy taxpayers from reducing their tax liability to next-to-nothing through various credits and deductions. It has been estimated that 15 million mostly middle class taxpayers will fall into the AMT trap this year because the system was not indexed to inflation.

However, crucially, the Senate bill has omitted a two year extension to the capital gains and dividend tax cut, which is due to expire at the end of 2008 under legislation passed in 2003, as Republican moderates, concerned at the level of the federal deficit, continue to defy President Bush's repeated calls for these tax cuts to be extended in order to preserve the momentum of economic growth.

This measure has been included in a $56.1 billion bill progressing through the House of Representatives. Chairman of the tax-writing Senate Finance Committee, Charles Grassley, has indicated that after a conference committee with the House, that the legislation will likely return to the Senate containing an extension of tax cuts on most capital gains and dividends through 2010.

The House is expected to begin the process of initiating final talks on the legislation this week. Both chambers would have to give final approval to a compromise measure.

Among the amendments to the Senate bill is a 2-year extension of a deduction for state sales taxes that expired in 2005, a provision that is also contained in the House legislation. The Senate measure also expands a research credit for two years.

The Senate bill also contains a controversial measure which changes an accounting practice used by oil companies, effectively hitting them with $4.3 billion in increased taxes. This measure has drawn flak from the White House, and it remains to be seen whether it will make the final draft of the legislation.

Recommended