Senate backs 5-year $70b tax cut

WASHINGTON -- The Senate yesterday approved a five-year $70 billion tax cut that extends several tax reductions that benefit primarily upper-income Americans, handing President Bush and congressional Republicans a welcome election-year victory in the key area of fiscal policy.

The bill, which the House passed Wednesday, was approved in the Senate yesterday in a vote that largely tracked party lines. It extends through 2010 the lower 15 percent tax rate on most dividends and capital gains, tax cuts that had been scheduled to expire at the end of 2008.

The measure also limits the reach of the Alternative Minimum Tax through 2006. The AMT is a parallel tax structure designed to prevent the rich from ducking taxes, but it has begun to ensnare a larger number of middle-income citizens.

Big oil companies won their push to keep intact accounting changes that stand to net them $5.1 billion. In addition, the bill includes a series of narrow tax breaks designed to benefit groups including shipping vessel operators, songwriters, and companies that establish settlement funds to pay for environmental damage.

For Republicans, the tax bill is a hard-fought achievement in an increasingly hostile political environment. Their ''health week" in the Senate has failed to pass a single bill, but Republicans predicted that voters will respond to their low-tax message this fall.

''We will be successful in keeping the progrowth policy of President Bush solid and strong," said Senator Bill Frist, the majority leader and a Tennessee Republican. ''Keeping taxes low fuels economic growth, and that creates jobs."

Yet Democrats were equally pleased with yesterday's vote, saying the tax bill is a prime example of Republicans favoring the rich and showing no regard for near-record deficits. A report by the liberal Tax Policy Center found that the bill will give the lowest 60 percent of earners barely 1 percent of the benefits, while the top 10 percent would enjoy nearly 80 percent of the tax cuts.

''The American people will change the leadership in Congress because of things like this," said Senator Charles E. Schumer of New York, the chairman of the Democratic Senatorial Campaign Committee. ''The GOP made its choice, and they chose millionaire investors and oil companies over middle-class families."

Democrats said the bill does not renew recently expired tax deductions for state and local sales taxes, college tuition payments, and for teachers who purchase school supplies. Republicans say they will deal with those matters in a separate measure, though Democrats say there are no guarantees they will be taken up.

Still, for Republicans, the tax package was an opportunity to check off a legislative achievement on an issue that's popular with the party's conservative base. GOP lawmakers believe the strength of the economy is one of the main pillars of their reelection chances.

''It's going to help people. That helps candidates," said Senator Jon Kyl, an Arizona Republican who is facing a tough reelection race this year.

Senator George Allen of Virginia, another Republican who is up for reelection, added: ''We're on the side of the taxpayers. They're on the side of the tax spenders."

GOP leaders accused Democrats of favoring a tax increase by opposing efforts to extend the tax cuts, and said Democratic proposals would stifle economic growth. They named the bill the Tax Increase Prevention Act, and Republicans have already begun accusing Democrats who voted against the bill of voting for a tax increase.

''The way you create revenues is you create an incentive for economic activity," said Judd Gregg, the Senate Budget Committee chairman and a New Hampshire Republican. ''You create an incentive for more people to go out and invest."

Republicans also argued that benefits accrue primarily to upper-income taxpayers because higher-income residents pay far more in taxes. Charles E. Grassley, chairman of the Senate Finance Committee, said keeping taxes low will create jobs that all Americans can benefit from.

''Extending the lower rates will allow millions of Americans to keep more of their money to spend or add to their savings through reinvestment in the economy, rather than give it to the federal government to spend," said Grassley, an Iowa Republican.

Democrats, meanwhile, used the debate to accuse Republicans of irresponsible fiscal management. Extending the lower tax rates on dividends and capital gains is expected to cost $20.6 billion, and protecting middle-class earners from the AMT is expected to cost $33.9 billion.

Those costs will contribute to the national debt, which is approaching $9 trillion, said Senator Frank R. Lautenberg, a New Jersey Democrat. ''When you're in a hole, stop digging," he said.

The bill is expected to generate $6.4 billion over the next 10 years by allowing upper-income residents to convert traditional IRAs, which are taxed when money is taken out of them, into Roth IRAs, which grow tax-free.

But Democrats called the provision an accounting gimmick that amounts to a giveaway to the rich. They argued that the government would lose out on far more revenue in the long run than it would take in in the short term, since even those who make more than $100,000 a year will be able to save for retirement tax-free.

Democrats also denounced as inadequate the one-year fix to the AMT. For 2006, joint filers who make up to $62,550 and individuals who make up to $42,500 will be exempt under the bill, leaving millions of other middle-class taxpayers facing a possible tax increase.

Representative Richard E. Neal, a Springfield Democrat, said Republicans are ducking a permanent replacement for the AMT because they like to pass annual tax cuts that they can claim help the middle class. ''It's about as good a masquerade job as I've heard of," said Neal, a member of the House Ways and Means Committee.

The Senate passed the bill 54 to 44. The only Democrats to vote for it were Senators Ben Nelson of Nebraska, Bill Nelson of Florida, and Mark L. Pryor of Arkansas. The only Republican ''no" votes were cast by Senators Lincoln D. Chafee of Rhode Island, Olympia J. Snowe of Maine, and George V. Voinovich of Ohio.

Republicans said the vote exposed Democrats as supporters of big government and higher taxes. A similar strategy has helped Republicans pick up seats in the past two congressional elections.

Rick Klein can be reached at rklein@globe.com.