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Key Tax Cut Bill Pushed Back Until 2006

by Mike Godfrey,, Washington

15 December 2005

Senate Majority Leader Bill Frist (R - Tenn) told reporters earlier this week that it is very doubtful whether Congress will pass a key tax cut bill before the Christmas holiday recess, as lawmakers rush to complete a number of other important legislative items before the year's end.

The bill will contain a number of important tax cut items, such as an extension of the dividend and capital gains tax cuts beyond their present expiry date of December 31, 2008, and the renewal of various other tax incentives for businesses and individuals. However, because the House and Senate have yet to resolve differences in their respective bills, the legislation is unlikely to be enacted before February 2006.

The delay means that lawmakers will be unable to apply a one-year patch to the Alternative Minimum Tax before the preset fix expires at the end of this year. Consequently, an additional 15 million Americans face being dragged into the AMT net in 2006, although Republicans have indicated that they will apply the patch retroactively to the beginning of 2006.

The AMT is a shadow tax introduced in 1969 to ensure that wealthy Americans benefiting from various tax deductions and credits make a sufficient contribution to the tax system. However, the tax was never indexed to inflation and as a consequence is affecting increasing numbers of taxpayers down the pay scales that it was never intended to hit. It has been estimated that the AMT’s growing reach will affect about 20 million taxpayers by 2006, up from 3.8 million in 2004, and President Bush's tax reform panel has recommended that the system be abolished.

In the meantime, lawmakers are expected to turn their attention to a $45 billion deficit reduction bill and federal funding legislation. They are also likely to vote on a $7 billion tax incentive package designed to help the reconstruction effort in the areas of the Gulf Coast hit by Hurricanes Katrina and Rita earlier in the year.

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