House Approves $56.6 Bln Tax Measure Extending Dividend Rate

Dec. 8 (Bloomberg) -- The U.S. House passed a $56.6 billion budget measure that extends past 2008 a 15 percent tax rate on dividends and most capital gains.

The House voted 234-197 to extend for two years the 15 percent rate on dividend and capital-gains taxes that was slated to expire in 2008. Republicans credited President George W. Bush's 2003 tax reductions on investments with boosting the stock market and the economy.

``These tax cuts have indeed done what the president said they would do,'' said Louisiana Representative Jim McCrery, a senior Republican on the House Ways and Means Committee. House Speaker Roy Blunt, a Missouri Republican, urged lawmakers to ``keep the structure that's growing this economy in place.''

The vote today sets up a conflict with the Senate, which has approved legislation devoted to limiting the alternative minimum tax without extending the investment tax breaks. Republicans must now find a way to pass final legislation that combines the extension of investment tax breaks and a measure to spare 15 million Americans, most of whom earn between $100,000 and $500,000, from a $30 billion increase in the minimum tax next year.

Enacting both provisions would add about $100 billion to the national debt over the next five years. A budget agreement passed in April authorizes only up to $70 billion.

House Minority Leader Nancy Pelosi, a California Democrat, accused Republicans of preserving tax cuts for the richest 1 percent of American earners after reducing the growth of spending programs for low-income people such as food stamps and putting the alternative minimum tax legislation at risk.

``The poor suffer, the rich benefit, and the middle class foot the bill,'' she said.

House AMT Measure
The House yesterday passed a temporary solution to the alternative minimum tax in the hopes the Senate would approve its AMT measure separately from the budget legislation, McCrery said. That would create room in the Senate budget legislation for the extension of the dividend and capital gains tax break, which isn't popular with Senate Democrats who say it disproportionately benefits the wealthy. Republicans such as Ohio Senator George Voinovich and Maine Senator Olympia Snowe, who oppose widening the $319 billion deficit, also have expressed reservations about the investor tax breaks.

``We'll get both,'' McCrery said.

New York Representative Charles Rangel, the top Democrat on the Ways and Means Committee, said House Republican leaders are following a strategy that won't work.

Asking the Senate to pass the minimum tax legislation separately from the budget measure, which can't be filibustered, puts that break at risk while giving extension of the dividend and capital gains reduced rates a better chance of becoming law, he said.

``We need the consent of every senator to provide the relief of the bill passed yesterday,'' Rangel said, referring to the House AMT measure, which passed 414-4 and exempts the first $58,000 of income from the AMT.

The Bush administration has been drawn into the dispute because it previously had declared it would take on the alternative minimum tax as part of a fundamental overhaul of the tax system. Now, White House officials say the administration is working with Congress to address the AMT issue. The administration also wants to see the dividend and capital gains tax breaks extended.

The minimum tax was created in 1969 to prevent 155 wealthy people from reducing their tax liability through excessive exemptions, credits, and other deductions. Because the tax wasn't indexed for inflation, it increasingly is affecting people with lower incomes. Congress has periodically passed legislation adjusting the tax's scope.

Research Credit
The impasse over final legislation puts at risk other major components of the tax measure, most of them provisions due to expire at the end of this year.

One provision is a research tax credit worth about $5 billion in annually to companies such as Redmond, Washington- based Microsoft Corp., Chicago-based Boeing Co., and Plano, Texas-based Electronic Data Systems Inc.

While the credit has expired and been renewed more than a dozen times in the last couple of decades, companies will have to adjust their accounts if it isn't renewed this year.

Failure to renew the research credit by Jan. 1 will force companies to assume the law has lapsed when they project earnings and liablilities for the coming year, said Ed McClellan, a partner at Alston & Bird LLP and a staff member on the Senate Finance Committee until early this year. As a result, companies will have to assume they face higher taxes, which will hurt earnings for the first quarter and reduce profit estimates for the rest of the year, he said.

`A Big Number'
``Depending on the profile of the company, that can be a big number,'' McClellan said.

Other popular breaks in the House measure include extension of a provision that allows Americans to deduct state and local sales taxes paid on their federal tax returns. The break, put back in the law in 2004 after an 18-year hiatus, expires this year.

It particularly helps residents of states that have no income tax such as Tennessee, Texas, Florida, Wyoming, New Hampshire, Alaska, Washington, Nevada, and South Dakota. Under the law, Americans may deduct either income or sales taxes paid to state and local governments.

The House measure approved today also renews a break in the 2003 tax law that allows small businesses to write off the first $100,000 in equipment purchases in their first year of use instead of depreciating the cost over time. That's a $75,000 increase over previous law.

The measure also includes breaks such as a tax credit for companies that hire welfare recipients, a government matching program for low-income Americans who save for retirement and a deduction for teachers who buy their own classroom supplies.

To contact the reporter on this story:
Ryan J. Donmoyer in Washington at