The Tech - Online EditionMIT's oldest and largest
newspaper & the first
newspaper published
on the web
Boston Weather: 40.0°F | Partly Cloudy and Breezy

Senate Makes Room For Tax Cuts by Increasing Other Taxes

By Jim VandeHei
THE WASHINGTON POST -- washington

Senate Republicans, struggling to make more room for President Bush’s cherished tax-cut plan in their annual budget, on Thursday settled on an unusual and controversial solution: raise taxes elsewhere.

Under White House pressure to include at least a bare-bones version of Bush’s bid to eliminate taxes on corporate dividends, Finance Committee Chairman Chuck Grassley, R-Iowa, and fellow committee Republicans broke from their no-new-taxes theology to propose tax increases on Americans living abroad, companies sheltering income overseas, and others. All told, they approved more than 30 tax increases or other revenue-raisers in order to help fund their tax cut in other areas, including dividends.

Americans working overseas would be hit the hardest: the bill would no longer allow them to exclude $80,000 in income from federal taxes. That provision alone would amount to a $32 billion tax hike.

“This is a big tax increase” for oil and gas workers from Louisiana who work overseas, said Sen. John Breaux, D-La.

Some House Republicans reacted angrily to the idea of raising any taxes. “Any kind of tax increases now are wrong and they wouldn’t make it through the House,” said House Rules Committee Chairman David Dreier, R-Calif.

His comments underscore the uncertainty and difficulty of Congress’s tax debate. The House, scheduled to vote on tax cuts Friday, is certain to embrace a different plan, and the ultimate legislation will have to emerge from House-Senate negotiations that could prove contentious.

Grassley found himself squeezed Thursday between two political rocks. First, to gain enough votes for a budget resolution last month, he promised GOP moderates the tax cut package would not cost more than $350 billion over 10 years -- far less than the $726 billion Bush originally sought. But Bush and many other Republicans insisted on at least a partial cut in the dividends tax, a difficult if not impossible feat with a $350 billion cap.

Thursday’s solution: Raise taxes in other areas that might prove politically viable. The Senate Finance Committee approved a $421 billion tax cut that, according to Congress's math, “costs” only a net of $350 billion. The tax increases would help finance, among other things, a small slice of Bush's dividends plan.

Pressed by fellow Republicans, Grassley salvaged the skeletal remains of Bush’s original plan to eliminate all taxes on dividends. The Senate bill would exclude the first $500 in dividends from taxes, and would reduce taxes on dividends above that. The Finance Committee passed the measure 12-9, with one Democrat, Sen. Blanche Lincoln of Arkansas, voting for it.