Saturday, November 26, 2005

Republicans Are Deeply Split Over How to Apportion New Tax Cuts

The New York Times

Republicans Are Deeply Split Over How to Apportion New Tax Cuts

WASHINGTON, Nov. 25 - Republicans of all stripes want to cut taxes, but rarely have they been in so much disarray about whose to cut.

If House Republicans and President Bush have their way, more than half of tax reductions over the next five years will go to the top 1 percent of households, those with average incomes of $1.1 million.

House leaders are pushing a $63-billion tax-cutting package that would extend President Bush's tax cut on stock dividends, protect oil companies from a windfall profits tax and shield people caught using illegal tax shelters.

The Republican-controlled Senate, by contrast, has passed a bill that would cut taxes by $59 billion but ignore Mr. Bush's top priority, and that contains two other provisions that have provoked his wrath.

The Senate bill omits an extension of Mr. Bush's tax cuts for stock dividends and capital gains, which are to expire at the end of 2008.

Instead, almost half of the bill is devoted to shielding middle-income and upper-income families from the alternative minimum tax.

The Senate bill has also proposed two revenue-raising measures that Mr. Bush has threatened to veto: a one-year, $5-billion tax on major oil companies and a provision that would make it easier to impose steep penalties on people caught using illegal tax shelters.

The impact of the two bills would be wildly different. According to calculations by the Tax Policy Center, a nonpartisan research group, about 51 percent of the tax cuts in the House bill would go to the top 1 percent of income earners.

The Senate bill favors upper-income families, but not nearly as much: only about 12 percent of the benefits would go to the top 1 percent of earners.

The enormous gulf reflects more than just Republican disarray. With budget deficits likely to widen again next year, even as Congress cuts money for programs like Medicaid and child support, Mr. Bush and his allies have to choose between warring constituencies.

Business groups are demanding that Congress extend tens of billions of dollars' worth of tax breaks and create new ones. Mr. Bush wants to lock in his legacy, even though his tax cuts do not expire for another three years. And millions of affluent families, especially those with two or more children, want to avoid the alternative minimum tax, which excludes tax breaks for dependents.

"The great middle of America is underrepresented in Congress," said Representative Jim Leach, Republican of Iowa, who is critical of the House tax bill. "The leadership will insist that a compromise be established. But what that final product is, I have no idea."

Even staunch supporters of Mr. Bush's agenda are torn.

"We're not going to be left out in the cold," vowed Representative Thomas M. Reynolds, a New York Republican whose affluent district in the Rochester area is packed with families who could be battered by the alternative minimum tax. "There is going to be a lot of negotiation."

The budget problems have amplified Republican difficulties. Staunch fiscal conservatives, seeking to attack the budget deficit, forced Republican moderates to vote for politically painful cuts in Medicaid, student loans and child-support enforcement.

But Republican moderates are now balking at tax cuts that overwhelmingly benefit the very rich.

Democratic lawmakers, hoping to exploit Republican uncertainty, have remained unusually unified and were almost jubilant when Mr. Bush threatened to veto the Senate tax bill because of the tax on oil companies.

"It just shows you how outside the mainstream they are," said Representative Sander M. Levin of Michigan, a senior Democrat on the House Ways and Means Committee. "What they should be threatening is to veto a cut in child-support funds, cuts in student loans or cuts in funds for child health care."

Republican leaders betrayed their own anxiety, postponing a vote on the House tax bill just before Congress's Thanksgiving break.

"It could be harder to get through the House than the Senate," said Representative Devin Nunes, a California Republican on the tax-writing committee. "What we decided to do is let people go back and think. We said, let's wait and make sure all the members are comfortable."

But there is no comfortable way for Republicans to deal with the budget math that confronts them.

Permanently extending Mr. Bush's tax cuts would cost about $1.4 trillion over the next 10 years, the Congressional Budget Office says.

Republican leaders already scaled back their ambitions months ago, and are trying to pass only about $70 billion in tax cuts for the next five years.

Simply extending Mr. Bush's tax cut on stock dividends for two years, as the House bill would do, would cost $22 billion. Preventing an automatic expansion next year of the alternative minimum tax, which would mean a surprise tax increase for about 15 million households, would cost about $27 billion.

The alternative tax was created in 1969 as a way to prevent millionaires from using too many deductions. But it is now engulfing millions of additional homes every year, partly because it is not adjusted for inflation and even more because of the way it interacts with Mr. Bush's tax cuts.

The alternative minimum tax's impact is heaviest on families with many children, because it excludes tax breaks for dependents, and for people who pay high property taxes and state income taxes.

The Bush administration estimates that, if nothing is changed, the number of families that face the tax will jump to 18 million in 1006 from 3 million this year.

More than one-third of all families with incomes below $100,000 would face the tax next year, according to the Brookings-Urban Tax Policy Center. Among married couples with two or more children, 73 percent of those earning less than $100,000 would be hit.

Senate Republican leaders, bowing to moderates in their party, decided to drop Mr. Bush's tax extension and focus on the more immediate impact of the alternative minimum tax. They also included $7 billion in tax cuts for Gulf Coast areas struck by Hurricane Katrina.

House leaders decided exactly the opposite. The chairman of the House Ways and Means Committee, Bill Thomas of California, has told Republican lawmakers that he will take up the alternative minimum tax next year as part of a broader tax overhaul.

But prospects for a sweeping tax overhaul next year are almost zero, most analysts say, because it would prompt too much opposition from entrenched interest groups in an election year.