WASHINGTON – The Senate gave final approval Thursday to a $70 billion election-year package of tax cuts that will extend lower rates for investors and also save billions for families with above-average incomes.
The Senate passed the measure by a 54-44 vote, clearing it for President Bush's signature.
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 will extend for one 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.
It is now common for taxpayers, especially those with families in high-tax states, to pay the AMT on incomes of $100,000 and more.
The bill also will extend for two years provisions sought by small businesses to let them write off up to $100,000 in investments in equipment and other expenses.
The debate followed partisan lines, with Republicans eagerly crediting the tax cuts, first enacted in 2003, with a surging economy, millions of new jobs and booming tax revenues. Democrats overwhelmingly opposed the bill, saying its tax cuts on capital gains and dividends will flow mostly to wealthy.
Just three Republicans — Olympia J. Snowe of Maine, Lincoln Chafee of Rhode Island and George Voinovich of Ohio — voted against the bill. Democrats Ben Nelson of Nebraska, Bill Nelson of Florida and Mark Pryor of Arkansas voted in favor.
Republican Gordon Smith of Oregon originally registered a "nay" vote but changed to "aye" just before the tally was announced.
Republicans said to fail to extend the tax cuts would amount to a tax increase on investors, big and small, as well as on families facing the alternative minimum tax. They've dubbed the bill the "Tax Increase Prevention Act."
"Are we going to increase taxes on well over 100 million people ... or are we going to keep takes low?" said Majority Leader Bill Frist, R-Tenn.
Appearing with Frist and other GOP senators, Treasury Secretary John Snow said, "This is a defining day. A vote today will tell the American people who supports lower taxes and who doesn't."
Democrats countered that Republicans were favoring the wealthy and even oil companies while letting languish Senate-passed tax breaks on college tuition and state and local sales taxes, as well as a research and development tax credit for businesses. Each expired in December.
They blasted GOP negotiators for dropping a Senate-passed provision that would have closed an inventory accounting practice known as "last in, first out" that is used by oil companies and other businesses to help lower their tax burden.
"The Bush administration and the Republican leadership are far more interested in helping their wealthiest friends than hardworking, middle-class Americans," said Charles Schumer, D-N.Y. "The GOP made its choice, and they chose millionaire investors and oil companies over middle class families."
Passage of the bill is the first step of a two-track strategy for advancing the GOP's election-year tax cut agenda. Finance Chairman Charles Grassley, R-Iowa, said again Thursday that another bill containing widely backed tax cuts favored by Democrats would advance soon as part of a follow-up bill.
The first measure focused on investor tax breaks and alternative minimum tax relief and it can advance under special rules blocking Senate Democrats from filibustering it to death. A senior Senate GOP budget aide said the later bill would contain perhaps $23 billion in tax breaks backed by Republicans and Democrats.
Those 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 the R & D tax credit for businesses.
The measure will also end a tax break U.S. companies such as Boeing use to reap large benefits on "grandfathered" export contracts. The World Trade Organization has termed them an illegal subsidy and has threatened to retaliate.
Economists said the 2003 cuts on investments and other pro-business incentives had had a positive impact on the economy, though not as much as claimed by Washington policymakers.
"The evidence so far suggests they've had a small positive impact on stock values and by extension the broader economy," said Mark Zandi, chief economist for Moody's Economy.com. "But a very modest positive impact. ... It's strong enough to argue that these tax cuts should be made permanent."