The Senate is a little closer to resolving the unprecedented (even by congressional standards) contention surrounding the tax cut, and a reduction of the dividend tax is among the measures it's embracing once again. The Senate Finance Committee -- headed by Iowa's moderate Republican Charles Grassley -- hammered out a $430 billion tax-cut package late Wednesday night. That's still far less than the $550 billion plan the House Ways and Means Committee is working on, but it's more than the $350 billion the Senate steadfastly insisted it wouldn't go beyond. In an unparalleled (and somewhat untoward) move last month, the Senate and House each essentially
agreed to disagree on how much the federal government should allot for tax cuts in the 2004 budget. The House was to go ahead with its $550 billion tax-cut plan, while the Senate -- which has a slim Republican majority and no shortage of moderates -- insisted that it would not allow more than $350 billion in tax cuts to get into the budget. That amount ensured a thorough eviscerating of President Bush's $726 billion plan, and all but guaranteed that the $396 billion cornerstone of his plan -- the elimination of the tax on dividends -- would not make it through. But in a move that attempts to appease Democrats and moderate Republicans while still getting a little bit of dividend-tax relief through, the Senate Finance Committee settled on a partial plan that will benefit the majority of dividend stock investors.
The committee's plan will exempt the first $500 in dividend payments from tax, which will cover 86% of all taxpayers, according to Sen. Grassley's office. Only dividends that are paid in taxable accounts will be eligible for this tax break. Investors holding dividend-paying stocks in 401(k) plans and IRAs -- indeed, the majority of investors -- will not see any relief. For investors with more than $500 in dividends, an additional percentage of their dividend payments will be tax-free, to be phased in over the next five to 10 years. The Senate Finance Committee's plan costs $80 billion over 10 years, just one-fifth of what the president's plan costs. That $80 billion seems to have been tacked on to the Senate's original $350 billion plan (the details of which had not been decided). But while the committee's plan is now $430 billion, a spokesperson for the committee says that the additional $80 billion will be financed through a crackdown on corporate tax shelters. Indeed, even President Bush's plan for dividend-tax relief stipulated that only corporate earnings that had been taxed would be eligible for a tax break on the individual level. Investors in companies that sheltered much of their income from tax would not benefit as much from any dividend relief, as only dividends that had been taxed at the corporate level would be tax-free at the individual level.
Even moderate Maine Republican Olympia Snowe -- who had staunchly supported the $350 billion tax-cut plan -- announced that the new plan, inclusive of the dividend relief, was now fiscally responsible. It's likely that the rest of the Senate will support the committee's proposal, although there's still a battle ahead. Eventually, the House and Senate will have to agree on what gets included in the final budget. The House almost certainly will have to come down in its expectations for tax relief, something that won't happen quickly or easily.