Senate Narrowly Passes $350 Billion Tax Cut

The Senate, in an attempt to revive a laggard economy, narrowly passed President Bush's $350 billion package of tax cuts Thursday, which includes suspending all taxes on stock dividends for the next three years.

Passed on a 51-49 mostly party-line vote, the Republican bill is less than half the size Bush originally sought -- but one that advances previously scheduled reductions in income-tax rates, provides $20 billion in new aid to state and local governments and raises taxes for a few.

Bush commended the Senate for passing the measure. The bill still has to be reconciled with the House version, which calls for $550 billion.

"Jobs are on the line and I look forward to working with the full Congress to pass a robust economic growth plan," Bush said in a White House statement after the vote. "I call on Congress to resolve their differences quickly so that I can sign a bill that will help create jobs, boost take-home pay and spur economic growth."

Treasury Secretary John Snow (search) called the Senate's action on dividends a "bold step," saying it "will have a profoundly positive effect on job creation, corporate governance and the well-being of all Americans."

It also would increase the child tax credit from $600 to $1,000, gradually eliminate the marriage penalty and encourage new investment by small businesses by allowing them to write off $100,000 in new equipment purchases. It also speeds up income tax-rate cuts for individuals and families.

Overall, the measure would cut taxes by nearly $420 billion -- and provide $20 billion in spending for Medicaid and other programs for financially ailing states, while raising other levies and fees by almost $90 billion.

Bush has been pushing for a complete elimination of the dividend tax. But the Senate plan only suspends it for three years, then brought back. Opponents say that amounts to tax trickery.

The suspension was added earlier Thursday only after Vice President Dick Cheney (search) was called to break a 50-50 tie on the issue.

Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee (search), said he hoped to begin negotiations next week with the House, which this month passed its own package of $550 billion in tax cuts through 2013.

Bush had asked Congress to abolish taxes on dividends paid to investors at a cost of $400 billion over the next decade, arguing that corporate profits are now effectively taxed twice, once at the corporate level and again by stockholders on the dividends paid to them.

But GOP moderates nervous about burgeoning federal deficits forced Republican leaders in both chambers to shrink the overall tax cut, and the fate of the dividend reduction was often in doubt.

The House instead voted to reduce the top rate on them, as well as capital gains, to 15 percent. Dividends and capital gains are now taxed at a maximum rates of 38.6 percent and 20 percent respectively.

The Senate bill chops dividend taxes in half this year, suspends them entirely in 2004, 2005 and 2006, and restores them in 2007, at a total cost of $124 billion.

Democrats argued the suspension would come at the expense of married couples whose tax breaks were scaled back.

"Americans today who otherwise will receive the relief on the marriage penalty contained in this bill are going to be subsidizing and paying for, in effect, these tax-free dividends," said Sen. Max Baucus, D-Mont.

Democrats argued that a payroll tax holiday rebating some Social Security and Medicare taxes to workers would stimulate the economy faster than suspending dividend taxes, but their ideas were repeatedly rejected by the narrowly GOP-controlled Senate.

"I'm not opposed to creating millionaires. I think the country needs more millionaires," said Sen. Mary Landrieu, D-La. "What I'm opposed to is constantly this other side coming to the floor trying to give breaks to the people that are already at the top at the expense of those at the bottom."

The bulk of the bill moves up cuts in income tax rates passed by Congress two years ago, increases the child tax credit to $1,000 and gives married couples a tax break. It also lets small businesses expense more of their equipment investments.

The Senate bill still has to be merged with a $550 billion package of tax cuts passed last week by the House, where Republicans rejected Bush's proposal to eliminate dividend taxes. Instead, the House voted to cut the maximum tax rates on both dividends and capital gains to 15 percent. Those maximum rates are now 38.6 percent and 20 percent respectively.

House Republicans criticized the temporary nature of the Senate's action on dividends compared with the House rate cuts that would last a decade.

"My view, it doesn't solve the problem," said House Speaker Dennis J. Hastert, R-Ill. "There needs to be a permanence."

Two Democrats, Sens. Ben Nelson of Nebraska and Zell Miller of Georgia, gave Republicans the edge they needed for suspending dividend taxation. Sen. Evan Bayh of Indiana added a third Democratic vote for final passage of the bill. The Senate Finance Committee had decided earlier to excuse investors from taxes on the first $500 in dividends each year.

Republican George Voinovich of Ohio declared himself the 50th senator to back the plan Thursday morning after the White House agreed to convene a commission to rewrite the entire tax code. Republican Sens. John McCain of Arizona, Lincoln Chafee of Rhode Island and Olympia Snowe of Maine voted against the dividend tax suspension.

The Senate had to work within a budget passed last month that limited tax cuts to $350 billion through 2013, forcing Republican tax writers to scramble for new sources of revenue.

The Senate added language that blocks companies such as Enron and Global Crossing that overstated their earnings from claiming a tax refund.

In stumping for his economic package in recent weeks, Bush has issued stern warnings against corporate fraudsters.

Senators also agreed to reformulate Medicare to give rural states more money and to cut taxes on business profits earned abroad and brought back to the United States to 5 percent from 35 percent for one year.

John Breaux, D-La., failed in his attempt to repeal a tax increase on Americans working abroad. Those workers would no longer be able to exclude the first $80,000 of their foreign income from U.S. taxes, but they could claim a credit against any foreign taxes paid.

The Associated Press contributed to this report.