House and Senate negotiators reached agreement Friday night on the biggest tax cut in two decades, a complex package that reduces top income tax rates and provides for a late-summer rebate check of up to $300 for individuals and $600 for families.
The compromise largely matched the general outlines proposed by President Bush, including doubling the $500-per-child credit, easing taxes on married couples and repealing the estate tax, a long-sought goal of many small businessmen, farmers and other core Republicans.
But in the final hours, negotiators made some significant changes.
They lowered the top tax rate to 35 percent from 39.6 percent, not as far as the 33 percent the president wanted but lower than the 36 percent level approved by the Senate. In an effort to limit the loss of revenue to the federal government, they also delayed some of the key provisions, such as marriage penalty relief, for several years.
The most surprising last-minute change was an agreement to terminate all the tax cuts in the plan after 2010, just nine years after they take effect. The unusual provision was added mainly for accounting purposes, so that the tax cuts would fit within the congressional budget outline, and most lawmakers were confident that a future president and Congress would not allow them to expire.
Republicans said the total package would cost $1.35 trillion over 10 years, but budget experts said the final cost could be far greater.
The House scheduled a vote on the package for early Saturday morning, while the Senate planned to take up the tax bill later Saturday.
Under the plan, any American who paid federal income taxes would receive up to $300 in relief this year, with single parents receiving $500 and couples $600. The administration plans to begin mailing the refunds, totaling $30 billion, to taxpayers in late summer.
Final approval of the tax bill would mark a major legislative victory for the president, who campaigned on his pledge to reduce Americans’ taxes and has devoted a considerable amount of time to ensuring its passage since taking office.
It also would provide an upbeat ending for the president to a week in which the Republicans lost control of the Senate.
“This tax bill is a victory for Republicans, a victory for Democrats, it’s a victory for the president, and most importantly it is a victory for the taxpayers,” said Sen. Charles Grassley (R-Iowa), chairman of the Finance Committee.
Since he took office four months ago, the president has pushed relentlessly for the tax cut. He touted it as an antidote to a faltering economy and a means of returning part of the budget surplus to taxpayers.
Yet the final product represents a classic Washington compromise, designed to keep a fragile bipartisan majority in the Senate, placate conservatives and award the president the broad outlines of his original vision.
The decision to terminate the tax cuts in 2010 as a money-saving measure quickly came under attack from Democrats who opposed the bill as fiscally irresponsible. Without the change, Democrats charged, the cost of the tax cut would bust the $1.35 trillion level set this month in the congressional budget outline.
Implications on 2011 budget
“They’ve ripped off the last page of the calendar and are making believe 2011 doesn’t exist,” said Sen. Kent Conrad (D-N.D.), the incoming chairman of the Budget Committee. “Unfortunately, this has serious implications for the fiscal integrity of the budget.”
House-Senate negotiators also included a congressional proposal that would allow individual taxpayers to contribute more to individual retirement accounts and 401(k) plans.
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One of the last remaining sticking points was a demand by moderates — embodied by Jeffords’ defection from the GOP — that the final bill include a provision providing significant relief for the working poor. Sen. Olympia Snowe (R-Maine), like Jeffords a moderate, withstood strong pressure from administration officials and fellow Republicans to give ground on the plan.
The bill would lower the top individual tax rate, paid by people with incomes roughly higher than $300,000, to 35 percent by 2006 from 39.6 percent. This would bring it in line with the top corporate rate. Bush, who frequently said no taxpayers should pay more than a third of their incomes in taxes, had sought a top rate of 33 percent.
However, the bill also would eliminate the phase-out of itemized deductions and personal exemptions. White House officials said that the combination of the 35 percent rate and these other tax breaks would bring the effective top rate close to 33 percent.
Other top tax rates would decline. By 2006, the current 36 percent rate drops to 33 percent, the 31 percent rate to 28 percent, and the 28 percent rate to 25 percent. The 15 percent bracket is not changed, but the bill establishes a new 10 percent bracket on the first $6,000 of taxable income for singles and $12,000 for couples. These would take effect retroactively.
The administration had pushed hard for taxpayers to receive rebate checks in the mail this year, and negotiators agreed to the demand. The Treasury Department already has ordered the paper to issue the checks, but the precise mechanics of distributing the refunds were unclear Friday night.
The reductions in the top tax rates ensure that the wealthiest Americans will get most of the tax cut dollars. The top 1 percent pays 35 percent of federal income taxes and 23 percent of all federal taxes.
Child tax credit doubled
The bill would double the $500-per-child tax credit by 2010 and make it available for the first time to low-income families who earn a little over $10,000 a year but effectively pay no income or payroll taxes. The credit would increase to $600 this year, $700 in 2005, $800 in 2009 and $1,000 in 2010. The credit would revert to $500 in 2011.
The bill also would ease the penalty paid by half of married couples when they file joint tax returns, such as widening the 15 percent bracket so that more of their earnings are taxed at a lower rate, though the marriage penalty provisions would not take effect until 2005. It also would gradually reduce the estate tax over the next decade before repealing it in 2010. Before repeal, the exemption from the estate tax, now set at $675,000, eventually would rise to $3.5 million.
Lawmakers also included a raft of other provisions, including tax breaks for education.
Substantial dealmaking did not begin in earnest until late Thursday, and continued through Friday.
Throughout the talks, significant pressure was placed on Snowe to scale back her proposal to allow the working poor to claim the $500-per-child credit, which cost $50 billion more than a more modest expansion in the House version of the bill. It extended the credit to families who work full time at the minimum wage, with annual wages a little over $10,000. This would permit families — including 16 million more children — to receive at least part of the credit.
Under the plan, married couples with two children earning $20,000 a year could receive as much as $2,000 from the credit and other items in the bill.