Is the Dividend Tax Cut Doomed?

Updated from 7:47 a.m. EST

Strange days, indeed.

The Senate's surprise decision Tuesday to reverse its initial budget resolution left many Washington observers pondering the possible repercussions -- the most likely of which is that President Bush's beloved plan to eliminate the tax on dividend payments will never be implemented.

The Senate voted in favor of a budget resolution that included $350 billion allotted for tax cuts -- far short of the $726 billion President Bush asked for. Tuesday's vote overturned the decision the Senate made on Friday, when it scuttled the $350 billion plan and instead voted in favor of a resolution that included $626 billion in tax cuts.

The Bush administration has lobbied heavily to eliminate the tax on dividends; its plan included as its centerpiece $396 billion in dividend tax cuts alone. In other words, President Bush's dividend tax cut alone costs $46 billion more than the Senate says should be spent in that arena. And let's not forget there's still another $436 billion to the administration's planned tax cuts.

"This sends a strong signal to President Bush," says Tom Oschenschlager, a tax partner with Grant Thornton in Washington. "It's unlikely his dividend tax cut will get through the Senate -- I suspect that will be the first bite."

The House of Representatives passed its budget resolution on Friday. It included $726 billion in tax cuts.

"The House will pass anything the president proposes," Oschenschlager says, noting that the House Republicans, which have a majority, generally vote in a monolithic block. "The Senate is the only deliberative body at this point."

Budget resolutions simply set the amount each committee -- from the energy committee to the finance committee -- can spend when drawing up the details of their part of the budget. So when the Senate voted on $350 billion in tax cuts, it didn't eliminate any proposals in particular. It simply said to President Bush, Nope, sorry, you can't spend that much.