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Senate Votes to Extend Tax Cuts For Five Years

May 11, 2006 at 6:30 PM EDT
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RAY SUAREZ: With public discontent growing over the war in Iraq, with rising gasoline prices, and with congressional elections just six months away, President Bush and his fellow Republicans are turning to a historically popular component of their domestic agenda: tax cuts.

REP. DAVID DREIER (R), California: I’m a proud Republican. I’m a proud Republican. And by virtue of being a Republican, I was born to cut taxes.

RAY SUAREZ: As a $70 billion tax cut package made its way through Congress this week, Republicans, including Treasury Secretary John Snow, held several public rallies touting the benefits of slashing taxes.

JOHN SNOW, U.S. Treasury Secretary: Low tax rates lead to more investment; they lead to more GDP growth; they lead to more job creation; and they lead to rising real wages.

RAY SUAREZ: The bill that passed the House yesterday and the Senate today has two main elements. It extends the 15 percent tax rate on capital gains and dividends through 2010 — that was first reduced in 2003 — and it extends for a year protection for upper-middle-class families from the Alternative Minimum Tax.

While Republicans credit these tax cuts, first enacted in 2003, with a surging economy, in today’s debate, Democrats like New York’s Chuck Schumer said a majority of Americans are being left out.

SEN. CHUCK SCHUMER (D), New York: Too many provisions that affect the middle class are hurt, and the one that I’m going to focus on is one of the best provisions we have passed under this new president, and that is making tuition tax deductible, for people’s income who goes about up to $150,000 a year. That’s gone. That’s not extended for one new year or two new years; it’s gone.

And when people on the other side of the aisle, whether they’re up for re-election this year or not, vote against our proposals and vote for this tax bill, they will be taking away from the middle class one of the best benefits that we have given the middle class in recent years.

RAY SUAREZ: Mississippi Republican Trent Lott countered.

SEN. TRENT LOTT (R), Mississippi: I don’t understand this class warfare stuff that is always going on. You know, if you cut taxes for people that actually pay taxes, that’s bad. And if you cut taxes, you automatically will get less. When are we ever going to grow up and get over that?

RAY SUAREZ: Oregon Democrat Ron Wyden followed Lott.

SEN. RON WYDEN (D-OR), Senate Energy Committee: I just want to say to the distinguished senator from Mississippi that I’m certainly not interested in class warfare, but what I am interested is giving all Americans a fair chance to accumulate wealth.

RAY SUAREZ: Democrats repeatedly pointed to a study from the nonpartisan Tax Policy Center showing that millionaires would save an average of $42,000 in taxes under the plan while people earning less than $50,000 a year would save less than $50 in taxes.

Democrat Christopher Dodd’s home state, Connecticut, has the largest number of millionaires per capita in the country.

SEN. CHRIS DODD (D), Connecticut: As I stand here today, Mr. President, I would tell you that the majority of those people who do well in my state think this bill is a bad idea. They’re not calling, and writing, and e-mailing demanding that this bill be signed into law. They understand fiscal responsibility.

They think it’s a mistake for us to be going deeper, and deeper, and deeper into debt. With incomes of over a million dollars, they are 146,000 people in this country that make more than $5 million a year, 146,000 of them. They get an $82,000 tax break under this bill.

RAY SUAREZ: But New Hampshire Republican Judd Gregg argued that the wealthy carry the bulk of the overall tax burden.

SEN. JUDD GREGG (R), New Hampshire: The high-income individuals in this country actually paying more in taxes today than they did prior to the tax cuts, significantly more in taxes, and also bearing a larger percentage of the burden of taxes in this country today than they did before the tax cuts.

So it’s just a fairer way to approach tax policy. As a result of that fairer way, you generate more income, more economic growth, and that leads to more jobs, which is the purpose of our efforts here.

A party-line vote

RAY SUAREZ: This evening, the measure passed, readying it for the president's signature in coming days.

For more on the tax bill and its impact, politically and financially, I'm joined by Ryan Donmoyer, congressional and tax reporter from Bloomberg News.

And you've just come from Capitol Hill. Did this pass in the Senate, as in the House, and on a virtual party-line vote or close to a party-line vote?

RYAN DONMOYER, Bloomberg News: Yes, it did. It passed 54 to 44. Three members from each party switched sides. There were three Republicans, Senator Olympia Snowe, Lincoln Chafee, and George Voinovich all voted no for the package. And the three Democrats who voted for it were two Senator Nelsons, one from Florida, one from Nebraska, and also Senator Pryor from Arkansas.

RAY SUAREZ: How come this didn't need to pass by 60 as is required of tax bills that will deepen the deficit?

RYAN DONMOYER: Well, that goes to arcane budget rules that the Congress sets up. Under these very technical rules, any tax bill that originates in a budget only requires a 50-vote margin to pass in the Senate.

And so that's why this has sort of been the Holy Grail, if you will, for getting everything that you really must get passed into this thing, because Republicans knew that there were not 60 votes in the Senate for passing or extending the investment tax cuts.

Who benefits?

RAY SUAREZ: As we heard in the debate from the floor, there was a lot of back and forth about who was going to benefit from this package of extensions. Well, who does?

RYAN DONMOYER: Well, in an absolute term, yes, the gross amount of it goes to upper-income people. The Tax Policy Center, which you mentioned here in that report, indicated that, for people who earn between $40,000 or $50,000, the net benefit of this tax cut is in the neighborhood of $45. And if you earn over a million dollars, it's about $42,000. And for people who are lumped into a $100,000 to $200,000 income, the benefit is about $14,000.

Now, Republicans will argue essentially that the rich pay more and so, of course, since we're cutting income taxes, that they're going to be the ones who benefit. And they'll also argue that that contributes to a stronger economy, which creates jobs for people who may not get a direct benefit from the tax cuts, but they will argue that they get an indirect benefit.

RAY SUAREZ: One of the largest single aspects of the program, as I read it, is the patch that keeps more people from getting covered by the Alternative Minimum Tax. How does that work?

RYAN DONMOYER: Well, the Alternative Minimum Tax dates to 1969. It was originally intended to prevent very, very wealthy people from using excessive deductions to basically zero out their tax benefit.

As things tend to be in Washington, they never indexed it for inflation. And so, as incomes have risen over the last 25 years or so, more and more people in the upper-middle-income brackets are finding themselves ensnared by this thing.

There were projections that, unless steps were taken that were in this legislation, that as many as 15, 16 million households would pay this tax next year.

And so, basically, the patch essentially raises the amount of household income that is exempt from the Alternative Minimum Tax. They do this one year at a time now, because it is essentially going to blow a huge hole in the deficit if they try to fix it more long term.

Individual retirement accounts

RAY SUAREZ: Now, what about the convertibility of individual retirement accounts? This didn't get a lot of attention in this debate, but how does that end of faring and helping certain voters and not others, certain taxpayers and not others?

RYAN DONMOYER: Well, this was a late addition to the negotiations of this bill. The House and the Senate have been fighting over the contents of this legislation since last November, and it was only in the last month that we started to hear about this thing that you mentioned.

It essentially would waive for one year a limit, income limit, if you will, to convert a traditional IRA into a Roth IRA. Now, I don't give financial advice, but the Roth IRA is generally considered to be a much more favorable tax-preferred savings vehicle, because you make an after-tax contribution.

Then after that, your money grows tax-free. And then, when you withdraw it in retirement, you don't pay any taxes. And there are also other things you can withdraw money from a Roth IRA for, for example, a down payment on a first home, for some education purposes.

And so it's a very attractive vehicle. And Congress knew that in 1988 when they created this thing and so -- it was actually in 1987 -- and basically did two things.

The first, they said, you can only contribute to a Roth IRA if you earn, as a household, less than $160,000. The second thing that they did was say you can only convert a traditional IRA, which doesn't have as many tax benefits, into a Roth IRA if you earn less than $100,000.

What this provision does today is it waives that $100,000 limit in 2010 and it basically gives a window of opportunity for people who make six-figure incomes and have traditional, individual retirement accounts to transfer that money into a Roth IRA, pay the taxes once in that one year, and never pay taxes again.

The long-term outlook

RAY SUAREZ: Now, did this debate go on with a high degree of, let's say, self-consciousness about the fact that there's a looming election, both because it's nice to carry a tax-cutting credential into a midterm, but also out of fear that maybe it wouldn't be that easy to pass one after the new Congress takes its seats?

RYAN DONMOYER: Well, that is certainly the undercurrent, if you will. There's two ways of looking at this. This has been a top priority for the Bush administration going back about a year. They've wanted to see this dividend and capital gains tax cut extended.

It's been almost three years to the day that the Congress approved it in the first place. And so, in that regards, for very little for the administration to cheer about recently, a major tax cut clearing Congress is certainly something of a political victory. How it plays in the election remains to be seen.

But the longer term question is, yes, if Democrats were to take back control of the House and the Senate, there's an extreme unlikelihood that the dividends and capital gains tax cut would be extended.

The Alternative Minimum Tax patch would likely, you know, continue to be extended, because the Democrats have characterized that as a tax cut for middle-class families. The reality is, if you go back to those same Tax Policy Center numbers, 84 percent of the benefit of that AMT patch goes to families or households earning between $100,000 and $500,000 a year, so it's still predominantly a problem facing six-figure-income households.

RAY SUAREZ: And, very briefly, as of this moment, with you and I sitting here at this desk talking, all of these various things, still sunset at midnight on December 31, 2010?

RYAN DONMOYER: That is right. And, actually, you know, Democrats were complaining that there are a lot of things that have already sunsetted. We heard Senator Schumer just talking about college tuition breaks. There are tax breaks for teachers who buy their own classroom supplies and a research credit. And they have to rely on the word of Republicans, but they will eventually get done later this year.

RAY SUAREZ: Ryan Donmoyer of Bloomberg News, thanks a lot.