Skip to main content

While the debate over tax cuts rages on, Washington observers expect this will be the week Congress picks a number.

The contentiousness began

two weeks ago when the House of Representatives voted to include $726 billion for tax cuts in its budget resolution. While the budget resolution is technically just an earmarking of funds and does not specifically lay out how it should be spent, the House resolution indicated the tax bill that would follow would be identical to the $726 billion tax cut proposal issued by President Bush earlier this year.

The Senate, in a surprise vote, included just $350 billion for tax cuts in its budget resolution, effectively nixing the cornerstone of the administration's proposal: the 100% elimination of tax on dividends.

Since then, the Senate and House have been in conference working out a compromise.

"Historically, they've split the difference in these situations," says Tom Oschenschlager, tax partner with Grant Thornton in Washington, D.C. That would mean something like $500 billion to $550 billion in tax cuts would work its way into the budget.

That's still not enough to pay for President Bush's total elimination of the tax on dividends, though. That plan will cost $390 billion over the next 10 years.

It is, however, enough to push through the remaining $336 billion in tax cuts President Bush proposed.

TheStreet Recommends

"Once Congress picks a number, the exact nature of the tax cuts will come into shape pretty quickly," says Greg Valliere, chief strategist of Charles Schwab's Washington research group. "I'd expect that the package will include most, if not all, of Bush's proposal."

The $336 billion of President Bush's proposal that wasn't targeted toward dividends consists primarily of accelerating the tax breaks laid out in the 2001 tax law. The child tax credit of $600 per child under age 17, for instance, is scheduled to increase to $700 in 2005, $800 in 2009 and $1,000 in 2010. The rate of increase will likely be accelerated in this year's tax cuts, as will the scheduled reduction in income tax rates.

A tax cut package will also likely include some relief for the marriage penalty and aid to state and local governments.

The 50% Solution?

Solutions abound regarding the dividend dilemma, most popularly the idea of a 50% exclusion from tax on dividends. Another cheaper alternative: An 18% tax on dividends (the lowest capital gains rate, reserved for securities purchased after 2000 and held for five years) would cost $234 billion over 10 years, according to the Congressional Budget Office.

But whatever Congress cooks up, it won't include a solution to either of the two biggest problems in the tax code -- the fact that the 2001 law is still set to expire in 2010, and the increasing threat of the alternative minimum tax (AMT).

"Those are the two most oppressing issues," Valliere says. "And nothing's being done about them."

And nothing will be done about them -- not this year, at least. Congress is expected to come up with a final figure this week, before it takes its two-week holiday. If it does, the House will likely have a tax bill by mid-May, Valliere speculates, and the Senate can issue its bill by Memorial Day. (All tax bills must originate in the House.) That means the bill can be in conference by June (when the House and Senate iron out the differences in their bills), and it could be enacted by July 4.

"Once the budget number is ironed out, things will move quickly," Valliere says. At least, very quickly by Congressional standards.