The Senate vote ended up split 50-50 with Vice President Dick Cheney casting the tie-breaking vote.
The bill, which the House approved 231-to-200 in the early hours of Friday morning, now goes to the president, who has said he will sign it.
President Bush on Thursday praised the bill, the result of a House-Senate compromise finalized late Wednesday.
“The principle of the bill is pretty simple — that we believe the more money people have in their pockets the more likely it is somebody is going to be able to find work in America,” the president said.
The bill’s price tag of $350 billion — $330 billion in tax cuts and $20 billion in aid to states — over 10 years is less than the $726 billion the president originally sought. However, the costs are held down by so-called “sunset provisions” which make the tax cuts temporary unless Congress acts to make them permanent.
The agreement reduces the tax rate on most dividends and capital gains to 15 percent through 2008. Right now, capital gains are taxed at 20 percent and dividends are taxed the same way as ordinary income — at as much as 38.6 percent for taxpayers in the highest tax bracket.
Taxpayers in the lowest two tax brackets, few of whom invest in stocks other than tax-exempt 401Ks, will pay a 5 percent rate on dividends and capital gains through 2008. In 2009, those taxpayers will pay nothing on dividends.
However, for all other taxpayers, tax rates on both capital gains and dividends will return to current levels in 2009, an event many analysts say may not happen since it could be called a tax increase at that time.
The package also makes tax cuts not scheduled until 2006 effective immediately. Those include lower tax rates for most income brackets, a tax break for married couples, and an increase the tax credit for children to $1,000 per child from $600 for all but the wealthiest families.
Many U.S. workers will feel the effects in the next two months as less money will be withheld from their paychecks, and checks worth $400 per child will be mailed to 25 million middle- to low-income families.
The bill also allows firms to more quickly write off their investments and temporarily raises the amount of investment small businesses can expense from $25,000 to $100,000.
To get the needed votes, Republican Senate leader Bill Frist worked with Democrats Zell Miller of Georgia and Ben Nelson of Nebraska, as well as the moderate Republican George Voinovich of Ohio, who won last minute concessions from Vice President Cheney: $20 billion in aid to states and $12 billion to low-income families with children.
House leaders reluctantly agreed to Voinovich’s demands, paying for them by reverting to the full tax on dividends and capital gains in 2008, a year earlier than planned.
Democrats, who were not involved in the negotiations, said on Thursday the costs would be much higher than $318 billion and warned that the Republicans were harming America’s economic future by creating huge budget deficits.
“In the long run, the bill will not cost $350 billion or $550 billion, but it will really cost a trillion dollars or more,” Rep. Charles Rangel of New York, the ranking Democrat on the House Ways and Means Committee, said. He called the understanding “a bill that would shift the tax burden to states and cities, and pile up more debt on the backs of our children.”
Democrats also noted that in the same week Congress will vote for the president’s tax cut, they will also be voting to raise the $6.4 trillion limit on the nation’s debt by a record $984 billion.