For GOP, tax relief is political break, too

After months of wrangling over lobby reform, fiscal discipline, and immigration, Republicans came together this week around an issue that has united them in the past: tax relief.

The bill they just passed extends a 15 percent tax rate for capital gains and dividends until 2011 and reins in the reach of the Alternative Minimum Tax for the current tax year.

Republicans called it "tax increase prevention" but it's also a bid at Democratic victory prevention.

The move - the sixth annual tax cut of the Bush presidency - comes as Republicans try to find traction for fall elections that now look iffier for them than they did just a few weeks ago. They plan a second round of tax cuts before the vote in November.

"By virtue of being Republicans, we are born to cut taxes," said Rep. David Dreier (R) of California, at a GOP rally before Wednesday's vote.

Extending the tax cuts first enacted in 2003 had been a top priority for the White House in President Bush's second term. It took nearly a year for House and Senate negotiators to agree on the bill. And although the final product falls short of his request to make the changes permanent, it does give Republicans a rare boost in a year marked by party division and rancor.

"When in trouble, you fall back on the tried and true, and for Republicans, tax cuts are the tried and true," says Norman Ornstein, senior fellow at the American Enterprise Institute.

At the same time, House Republicans propose raising the debt limit to nearly $10 trillion - its fifth hike in the Bush years. When they took back the House in 1994, the debt limit was $4.9 trillion.

"The trouble for Republicans is they are going to be forced to increase the debt limit again, having just done it [in March], and this time to an embarrassingly large $10 trillion," Mr. Ornstein adds. "It's hard to argue that these tax cuts will cut the deficits, when they have had to raise the debt limit so many times."

The soaring national debt, some $2 trillion of which is in foreign hands, troubles lawmakers on both sides of the aisle. "If you want to explain how much our national debt is, it's handing out a $100 bill on a street corner every second of every day for 2,500 years," said Sen. Christopher Dodd (D) of Connecticut, speaking in opposition to the tax bill on the floor of the Senate Thursday.

"I'm not for raising the debt limit. I can't in good conscience do it," says Rep. Joel Hefley (R) of Colorado, who nonetheless voted with all but two of his GOP colleagues for the tax bill in the House on Wednesday. The bill passed the House by a 244-185 vote. Only 15 Democrats supported it.

The budget agreement for FY 2006 provides for $106 billion in tax relief over the next five years, including $70 billion that can be shielded from a Senate filibuster through the reconciliation process. The fight over which tax cuts should have protected status held up agreement on the tax bill for months.

House negotiators, led by Rep. Bill Thomas (R) of California, the outgoing chairman of the Ways and Means Committee, insisted that the 2003 tax cut that reduced the tax rate on capital gains and dividend income to a maximum of 15 percent be extended through 2010. This provision, not in the bipartisan Senate bill, was set to expire in 2008.

"They say that it's very important to have a long-term tax policy if you want to encourage investment," says Sen. Charles Grassley (R) of Iowa, the chairman of the Senate Finance Committee and lead negotiator.

Senators would have preferred to see more relief from the Alternative Minimum Tax. Passed in 1969 to ensure that very wealthy individuals would no longer avoid paying taxes, the AMT is on track to hit 20 million taxpayers in 2006 and over 41 million in 2013. "Absent congressional action, the AMT will 'take back' most of the tax relief granted through the income tax," according to a May 10 report by the Congressional Research Service.

House Democrats described the bill as slanted to the superrich. "Under this legislation, middle income families receive an average tax cut of $20, about half a tank of gas, while those with over a million receive $42,000," said Rep. Louise Slaughter (D) of New York, during Wednesday's House debate. "It's a telling indicator of where their priorities really lie." Republicans said that such arguments represent "the ideological baggage of the past."

Meanwhile, conservative groups who had been critical of the GOP-controlled Congress for not moving on tax cuts cheered the move.

"This is a huge step forward," says Grover Norquist, president of Americans for Tax Reform, an anti-tax group. "It sends an important signal to the economy that the 15 percent rate on capital gains and dividend payments is going to be there indefinitely. It will keep investment growing.

"It also sends an important signal to Republican voters and taxpayers that the president and Congress are moving and haven't dropped the ball. [Thursday's] eight-hour Senate debate on C-SPAN is like a paid political advertisement: Republicans cut taxes and Democrats don't," he adds.

The next round of tax cuts, expected to include about $30 billion in more popular tax breaks, is expected to draw more bipartisan support. These include extension of the tuition tax deduction, a research and development tax credit for businesses, and extension of tax deductions for state and local sales taxes.