Tax Cuts Attached To Compromise US Bailout Bill

by Mike Godfrey, Tax-News.com, Washington

02 October 2008

The United States Senate will vote tonight on a revised Wall Street bailout package which now has the added appeal of many billions of dollars in renewed tax breaks in an attempt to win round doubters on the merits of the initiative in the House of Representatives.

Senate leaders have decided to graft the tax extenders legislation onto the USD700bn bank rescue plan in the hope that the tax cuts will sway many more House Republicans to vote for the legislation, after the bill was rejected by chamber in a 228-205 vote on Monday.

About two-thirds of Republicans voted against the proposals for the US government to effectively buy up the toxic debt that is now festering in the financial system, while about one-third of Democrats voted against the bill.

The tax measures tacked onto the bill include a series of tax credit extensions for producers of renewable energy, about USD8bn in tax relief for business and individuals affected by the spate of natural disasters that have struck the mid-West and Gulf Coast this year, and yet another 'patch' for the Alternative Minimum Tax. Most of these tax provisions are not offset, except for the renewable energy section of the bill, which is paid for in part by limiting a tax deduction for the largest US oil and gas firms, and tightening rules on how these companies pay tax on their foreign income.

The Senate has already approved this legislation after voting 98-2 in favor of the measures last week, but House tax leaders have refused to pass legislation that is not fully offset, despite threats of a presidential veto on any bill which raises other taxes to pay for these tax breaks.

While the Senate has generally been applauded for its strategy of trying to win round Republican dissenters in the House with billions in un-offset tax breaks, there is a danger that this could sway some Democrats against the compromise, especially the hard-core of fifty or so fiscally conservative 'Blue Dogs' who insist on sticking to fiscal rules on fully-costed tax breaks so as not to add to the nation's deficit and debt levels.

The compromise package is expected to pass the Senate tonight, but the House is currently in recess until Thursday, so the outcome of the upper chamber's bold move is unlikely to be known until the end of this week.

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