Tax-cut status: ways, means, and the road ahead

Both houses of Congress have approved their own versions of massive 10-year tax cuts, different from what the Bush administration wanted but in the same ballpark. Now the showdown begins. A final version will probably take weeks to emerge.

Yet in a way, President Bush is already a winner. He will get one of the biggest tax cuts ever. And by cobbling together spare majorities of Republicans and a few conservative Democrats, he's effectively sidelined, for now, the liberal argument that the tax cuts skew to the wealthy.

For Bush, the real victory or loss will come in how the economy performs, and whether the tax package actually brings the stimulus it promises - or, conversely, drives up the budget deficit and damages the economy. The tax cut of 2001 - $1.3 trillion over 10 years - was also aimed at creating jobs. But thus far, this Bush presidency is noteworthy for its loss of jobs: 2.7 million.

"If the White House wants to use superlatives about this [tax cut] - saying 'best,' 'biggest,' 'most important' - numerically, you can probably make those arguments," says Stanley Collender, a budget analyst at Fleishman-Hillard in Washington. "But in terms of economic impact, you absolutely cannot," based on the size of the US economy, now more than $10 trillion a year.

Already, the outlines of a final tax-cut package are evident. The three plans - House, Senate, and White House - contain many elements in common:

• A lowering of the tax rates for individuals in four out of six tax brackets - to 35 percent, 33 percent, 28 percent, and 25 percent.

• Eliminating or reducing taxes on stock dividends.

• Elimination of most or all of the so-called "marriage tax penalty."

• Increase in the child tax credit to $1,000.

• Increase in the deductions that small businesses can take for equipment expenses.

The dividend tax cut - one of the central features of the White House plan, accounting for $396 billion of the Bush administration's original $726 billion proposal - may end up being one of the more contentious features of the package. The White House sought to eliminate taxes on dividends as long as companies had already paid taxes on the profit. But each house of Congress came up with different variants on that plan, mainly to lower the overall cost of their packages.

The most controversial feature of both the House and Senate proposals is the use of "sunsets" - provisions to eliminate a feature after a certain date. On the dividend tax, the Senate voted to cut the dividend tax in half in 2003, eliminate it altogether in 2004, 2005, and 2006, then allow the full tax to return in 2007.

The House would allow its provision for dividend and capital gains taxes - cutting each to 15 percent - to expire in 2013.

But the Senate's use of sunsets has come in for the most criticism, in part because that chamber was seen as the body likely to pass the most fiscally restrained plan.

Proponents of sunsets argue that they allow future Congresses to revisit policies and assess their effectiveness. Critics reply that sunsets are a gimmick allowing Washington to institute tax cuts far more expansive than they seem on paper. They caution that no future Congress or president would dare advocate, for political reasons, that the sun actually be allowed to set on any tax cuts.

So while the Senate's 10-year tax cut has a nominal bottom line of $350 billion, if all sunsets were eliminated, the actual cost would be $660 billion, according to the Center on Budget and Policy Priorities in Washington. By the same measure, the true cost of the House package - officially $550 billion over 10 years - would be $1.1 trillion.

Tax analysts also point out that, under the Senate plan, dividends are tax-free to the individual regardless of whether the corporation has paid any tax or not. Under the White House plan, which aimed to eliminate "double taxation," dividends are tax free as long as the business has paid taxes on that profit.

Individual tax rates

Both plans lower all income-tax rates and put more people in the lowest tax bracket. They also raise the child credit to $1,000 through 2005 (House) or 2012 (Senate).

Investment income

In the House plan, the maximum tax on dividends and capital gains drops to 15 percent (from 38.6 percent today) through 2012. In the Senate plan, dividend taxes are halved in 2003, eliminated in 2004-2006, and reinstated in 2007.

Business tax cuts

Both bills allow small businesses to write off more expenses immediately - raising the limit from $25,000 on factories and equipment to $100,000, through 2007. The House plan temporarily lets larger businesses write off half of their investment expenses.

State and local aid

The Senate bill provides $20 billion in new spending for Medicaid and other state and local programs.

Source: Associated Press