A bill awarding tax relief to investors and 15 million taxpayers facing the alternative minimum tax passed the House on Wednesday, giving President Bush and his GOP allies on Capitol Hill a long-sought election year victory.
The bill providing tax cuts worth $70 billion over five years passed by a 244-185 vote. The Senate was expected to clear the bill for Bush’s signature Thursday.
The legislation provides a two-year extension of the reduced 15 percent tax rate for capital gains and dividends, currently set to expire at the end of 2008.
It also would extend, for this year, recent changes to the alternative minimum tax — originally aimed at making sure the wealthy pay at least some taxes — to prevent it from hitting more upper middle-income families.
The debate divided starkly along partisan lines, with Republicans crediting the tax cuts, first enacted in 2003, with a surging economy, millions of new jobs and booming tax revenues. Democrats countered that the deficit-financed tax cuts are tilted in favor of wealthy investors and that the economic benefits are not as great as advertised.
“Our pro-growth policies have helped the economy create more than 5.2 million jobs since August of 2003,” Bush said in a statement. “By extending key capital gains and dividends tax relief, the House has taken an important step to continue to help hardworking Americans and to keep our economy strong and growing.”
Hastert: Tax relief = economic growth
“Our tax relief sparked this economic growth,” said House Speaker Dennis Hastert, R-Ill. “And by extending key provisions of that tax relief, today’s legislation adds just another spark to the already booming economy.”
Critics, including most Democrats, attacked the tax rate reductions on dividends and capital gains as being skewed in favor of the rich. They noted that it was the second half of a GOP budget package that began with $39 billion in benefit cuts over five years, many of which came from programs for the poor such as Medicaid.
Democrats also cited a joint study by the Urban Institute and the Brookings Institution that shows taxpayers with incomes greater than $1 million per year winning tax cuts of $42,000 under the bill while families with incomes of $50,000 a year would average a $46 tax cut.
“The Republican Party ... is sending all the millionaires on an all-expenses-paid vacation — for $41,000 a year,” said Rep. Jim McDermott, D-Wash. “The rest of America is being forced to choose between filling the gas tank or stocking the refrigerator.”
Added Richard Neal, D-Mass: “You cut taxes for Wall Street at the expense of Main Street.”
Just 15 Democrats joined all but two Republicans in voting for the bill.
Two-track GOP strategy
Passage of the bill is the first step of a two-track strategy for advancing the GOP’s election-year tax cut agenda.
The first, $70 billion tax bill focuses on investor tax breaks and alternative minimum tax relief and it can advance under special rules blocking Senate Democrats from filibustering it to death. Another bill, which contains up to $30 billion in tax breaks backed by both Republicans and Democrats, will advance later.
Those widely supported tax breaks include preserving tax deductions for state and local sales taxes, a tuition tax deduction, a tax break for teachers who buy their own school supplies and a research and development tax credit for businesses.
Roth IRA: Pro and con
Under the bill passed Wednesday, wealthier people would be allowed to transfer retirement savings into Roth IRAs. This would provide a shorter-term revenue boost, and therefore helped lawmakers fit more measures into the bill.
That’s because money moved from traditional IRAs into Roth accounts is taxed immediately, instead of later, when taxpayers withdraw their invested money.
Opponents say the Roth plan would help the Treasury now but shortchange the government in future years because money saved in a Roth IRA grows tax free.
The bill also would extend for two years provisions sought by small businesses to let them write off up to $100,000 in investments in equipment.
“What we do today protects jobs, protects the incomes of our people, strengthens America’s economy and protects our future,” said Rep. Nancy Johnson, R-Conn.
“It will increase our debt, cut taxes for the superrich, and do little for Americans struggling under skyrocketing gas prices,” said Minority Leader Nancy Pelosi, D-Calif. “In just five years, President Bush and the Republican Rubber Stamp Congress have turned a record surplus into a record deficit of nearly $3.3 trillion.”