GOP Tax Cut Plan Hits Snag

The GOP's tax cut agenda hit a snag Thursday when the tax-writing Senate Finance Committee, lacking enough Republican votes, postponed debate on $78 billion in tax reductions.

"No progress," Senate Finance Committee Chairman Charles Grassley, R-Iowa, said. Republicans talked among themselves most of the morning but couldn't agree on a combination of tax cuts that could win support from all of them.

They lacked the pivotal support of Sen. Olympia Snowe, a moderate Republican from Maine, who said she'd like to see senators concentrate their attention on matters that must be done this year, like tax cuts that expire in 2006.

"We're in a different economic environment," she said. "We've had three back-to-back hurricanes."

The list of tax cuts due to expire this year does not include reduced rates on capital gains and dividends — a top priority for other Republicans on the committee.

The 15 percent tax rate on that investment income runs out at the end of 2008, but many Republicans want to act this year and push that date ahead to 2010. The drafted bill, which the Senate committee had planned to debate Thursday, extended the tax cut's life for one year, until 2009. The House has yet to write its version of the tax cuts.

Snowe isn't the only moderate Republican to voice concerns about passing tax cuts this year. Sen. George Voinovich of Ohio, another Republican moderate, said he will vote against tax cuts because the government is accumulating too much debt and the economy does not need stimulation through tax reductions right now.

"It is time to recognize a simple fact of life," Voinovich said. "Contrary to what some of my colleagues seem to believe, tax cuts do not pay for themselves."

The Senate Finance Committee this week proposed tax cuts worth $78.1 billion over five years. About $7 billion is devoted to helping people affected by hurricanes and creating special tax incentives for the Gulf Coast to entice businesses back and aid those cleaning up.

The tax bill also would extend expiring tax cuts: tax write-offs for small business investments; a deduction for state and local sales taxes; a college tuition deduction; a business research and development credit; and a deduction for teachers who buy their own classroom supplies.

During the same five-year period, the bill would bring in an extra $9.3 billion to the Treasury through steps such as increasing fines and penalties, and cracking down on tax shelters.

About $2.1 billion would come from taxing the unearned income of children under age 18 at the same rate as their parents. That tax rule currently applies to children under 14.

When the provisions are combined, they would have a net cost to the Treasury of $68.8 billion over five years. That figure includes an extra $9.1 billion raised because the committee expects taxpayers to cash in their capital gains and pay tax at the reduced rate before the tax is scheduled to increase.

Extending only the tax cuts expiring at the end of this year would cost about $44 billion over five years.