Senate Approves Tax Cut Bill

by Mike Godfrey, Tax-News.com, Washington

21 November 2005

The United States Senate voted to approve a $60 billion tax cut bill early on Friday morning which will prevent an increase in taxation on individuals and businesses by extending certain provisions passed during President Bush's presidency and which are due to expire in the coming years.

The largest provision of the Tax Relief Act of 2005 at $32 billion is another temporary fix to the Alternative Minimum Tax which, according to Senate Finance Committee Chairman Charles Grassley (R - Iowa), the bill's chief architect, will prevent around 14 million families from falling into the AMT's net.

Designed in the 1960s to prevent the wealthy from avoiding most or all taxes by using exemptions, credits and other income deductions, the AMT is not indexed to inflation and consequently Congress has had to adopt a series of stop-gap measures to blunt its impact on the middle class. The latest such patch is scheduled to expire this year.

“The AMT is terrible and we need to repeal it,” Grassley said. “Until then, we owe it to American taxpayers to ensure that they’re not hit by this tax.”

To help small businesses, Grassley's bill includes a provision extending enhanced businesses expensing. This was first enacted as part of the 2003 tax act and increased the amount that small businesses may expense from $25,000 to $100,000 for three years (through the end of 2005). The measure was extended and expanded slightly as part of the American Jobs Creation Act of 2004 through 2007. The new tax bill extends that enhanced provision through the end of 2009.

“Small businesses create most jobs in our country,” Grassley noted. “We need to encourage them to keep up the good work.”

However, dividend and capital gains tax cuts, which are due to expire at the end of 2008, were not extended in the Senate version of the tax bill, an issue that is likely to set up a fight between Republican fiscal moderates and the White House, which is pushing for a two-year extension of the tax cuts through 2010. These measures have been included in a tax bill currently progressing through the House.

The Senate bill also contains some offsetting revenue raisers. One of these measures, a last minute inclusion to the bill broadening a crackdown on a foreign leasing tax shelter, will raise an estimated $5 billion.

Another more controversial measure would change the way that oil firms account for their inventories, a move that effectively raises oil company taxes by $4.3 billion. This provision has been included in defiance of the White House, and raises the possibility that President Bush could veto the legislation if it is contained in the final version of the bill.

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