Senate Republicans Reach Deal on Dividend Tax Cut

The Senate's Republican tax writers struck on agreement Wednesday on a dividend tax cut, ensuring that a scaled-back version of President Bush's call to eliminate such taxes entirely for shareholders will win support in the Senate Finance Committee (search).

The proposal combines elements favored by GOP moderates and conservatives. Shareholders would not pay taxes on the first $500 of dividend income. Committee Chairman Charles Grassley, R-Iowa, said that covers 86 percent of taxpayers who receive dividend income.

Shareholders with more than $500 in dividend income will get an additional percentage tax-free. For roughly five years, an extra 10 percent will be tax-free. For the following five years, an extra 20 percent will be tax-free.

The dividend tax cut will amount to more than $80 billion over a decade. Its cost will be offset by $80 billion to $85 billion in new revenue sources, Grassley said. Lawmakers worked through Wednesday evening finishing details of the bill. The Finance Committee is scheduled to vote on it Thursday.

The redrafted dividend tax cut won support from Sen. Olympia Snowe (search), R-Maine, who had forced Republicans to bargain for a smaller dividend tax cut. It is still opposed by Democrats on the panel.

"Given my concerns about future deficits, I believe this plan is a fiscally responsible approach," Snowe said.

Senators did not completely eliminate taxes on dividends within the outline of $350 billion in tax cuts over the coming decade. Conservatives who had made eliminating dividend taxes entirely for shareholders their top priority said they will support the smaller cut for now but will try to reshape it during later debate.

"A lot of members would like to see a stronger dividend provision that has more punch," said Sen. Rick Santorum, R-Pa.

The bill also will include $20 billion in aid to economically ailing states, another priority of Republican moderates, including key members of the committee. Majority Leader Bill Frist (search), R-Tenn., said he will support some state aid, and the White House stopped short of ruling it out.

The rest of the bill will cut income tax rates ahead of schedule, increase the $600 child tax credit to $1,000 and reduce taxes for married couples. Small businesses would be able to write off $75,000 in expenses. All of the tax cuts continue through 2013. It would cut taxes more than $430 billion, but the net cost to the Treasury would be $350 billion.

House tax writers also decided to speed up income tax rate cuts planned for later this year. But other benefits, including the $1,000 child tax credit and tax cuts for married couples, end in three years to keep the cost of the legislation within a $550 billion budget.

The single largest portion of the House bill lowers the top tax rate for stock dividends to 15 percent from 38.6 percent. It treats dividends like capital gains and lowers the tax rate for both.

House Democrats unveiled their plan for economic stimulus on Wednesday. It increases the child tax credit to $800 and reduces the marriage penalty for low-income taxpayers. Businesses who hire workers unemployed for 6 months or more could claim a tax credit. It also extends unemployment insurance and gives states $44 billion in aid.

The tax cut and spending plan is paid for over the next decade by freezing the top income tax rates and closing corporate tax shelters. "Our plan adds one million new jobs without adding a penny to the deficit," said House Minority Leader Nancy Pelosi, D-Calif.