US Lawmakers Abandon Tax Cut Negotiations

by Mike Godfrey, Tax-News.com, Washington

11 April 2006

Republican lawmakers have abandoned their attempt to push through a $70 billion tax cut package after House and Senate negotiators failed to reach agreement on the provisions of the bill ahead of the April Congressional recess.

The postponement of the talks means that lawmakers will not be in a position to approve important provisions such as extending the capital gains and dividend tax cuts for an additional two years, nor put in place an Alternative Minimum Tax 'patch' before the April 17 tax filling deadline, as had been hoped.

The investment tax cuts are due to expire at the end of 2008, and the Bush administration has been pressuring Congress to ensure that the tax cuts are at least extended, warning that failure to do so would damage the economy. Indeed, Treasury Secretary John Snow cancelled a trip to the mid-West on Friday to put his weight behind the tax cut cause, and Snow's chief spokesman, Tony Fratto, told reporters that the administration believes that extending the tax cuts on dividends and capital gains for two years is "critical for this economy".

If left to expire, the top tax rate for capital gains would increase to 20%, and dividends would be taxed at marginal tax rates as high as 39.6%.

Failure to agree a final tax cut bill also means that millions more middle-class Americans will be dragged into the AMT net this year. A temporary provision, effective through 2005, increased the AMT exemption amounts to $40,250 for a single taxpayer, and $58,000 for a married couple filing a joint return.

Beginning in 2006, the AMT exemption amounts declined to $33,750 for a single taxpayer, and $45,000 for a married couple filing a joint return.

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".

Other items that lawmakers are trying to squeeze into the bill include expanding the amount of investment that small businesses can write off and lifting income restrictions on contributions to certain retirement accounts.

Lawmakers expect to restart negotiations after the two-week congressional recess.

Recommended