Another battle over the elimination of the dividend tax was fought on the Senate floor Thursday, with another absurd result in a string of bizarre congressional decisions .

When the Senate narrowly passed its $350 billion tax-cut package late Thursday night in a 51-to-49 vote, it looked pretty much like what was expected -- an increase in the child tax credit and measures to phase out the marriage tax, for instance. There was one big exception: a three-year repeal of the tax on dividends.

While some Republicans are happy to get any dividend-tax relief, most Democrats and Washington observers expressed exasperation at the uselessness of a tax break with such a short "sunset," or expiration date, saying that it won't affect corporate behavior. And affecting corporate behavior, remember, is ostensibly the aim of such a break.

Montana Democrat Max Baucus, ranking member of the Senate Finance Committee, called the provision absurd and irresponsible. "It's a yo-yo tax provision ... now you see it, now you don't," he said. "You tell me if corporations are going to plan their dividend distributions around a tax break that expires after three years."

The dividend-tax relief would begin in 2003, with only 50% of stock dividends subject to tax. In 2004, 2005 and 2006, all stock dividends would be exempt from tax (provided the company has paid tax on the profits at the corporate level). But according to this Senate plan, in 2007 the exemption will expire and once again all dividends would be taxed at the individual investor's income tax rate.

"It's crazy tax policy," says Tom Oschenschlager, tax partner with Grant Thornton in Washington, D.C. "Even staunch conservatives who want the dividend-tax cut say that a three-year break won't help."

Eliminating the tax on dividend payments, the argument goes, will not only put more money back into investors' pockets, but also encourage them to buy more stock. That will give companies the capital (and the general sense of well-being) to expand their businesses, which in turn will create more jobs. But a three-year tax break will not likely alter anything.

The dividend tax relief came in the form of a last-minute amendment sponsored by Oklahoma Republican Don Nickles. The Senate deadlocked on the amendment's vote, and Vice President Dick Cheney broke the tie in favor of its inclusion.

The Senate has steadfastly refused to allow a tax-cut package to exceed $350 billion, unlike the House of Representatives, which passed a $550 billion tax-cut package. The House plan doesn't eliminate the tax on dividends, though. Rather, it cuts the rate to 15%, and lowers the capital gains rate to the same amount to boot. The House plan expires after 10 years, in 2013.

Outside of the consternation over the dividend-tax issue, the Senate and the House plans are fairly similar overall -- both accelerate tax breaks already in the law (those set to expire in 2011), including increasing the child credit and lessening the impact of the marriage penalty.

In most aspects of the plans, differences arise primarily in the phase-in and expiration dates. The Senate wants relief for states, though, and included a plan that gives U.S. multinational companies a year to repatriate profits from abroad at a reduced tax rate of 5.25%, instead of the current 35% rate.

But not surprisingly, the contention is still over eliminating the dividend tax. And even though the Senate plan has a short expiration date and is unlikely to prompt much change in corporate behavior, President Bush will likely back the Senate version over the House. The reasoning is simple: President Bush is betting that the economy will rebound, and in 2007, Congress will feel obligated to extend the tax break.

"Even if the plan is enacted as is, with just three years of relief, as a practical matter there's a high likelihood that something like that will be extended or implemented later," says Jack Cummings, a corporate tax analyst with RIA, a provider of tax research and law information. "In ensuing years, I'd expect to see something more like what the president proposed."

Currently, the Nickles proposal simply says that if you get a dividend from a company, you won't owe tax on it. Absent from the plan are all the details and nuances in the president's proposal -- such as the idea of reinvested dividends also being exempt from tax, essentially lowering the capital gains tax rate.

There's still a long battle ahead for what will ultimately become the tax bill -- the Senate and House must now go into conference and try to resolve those differences. But now the prognosticating in Washington is not only what will happen with this bill, it's also about what future bills this might spawn.

"If the economy is going gangbusters, the Republicans will point their fingers and say you have to extend. But if it doesn't work, and it just increased our deficit, then that's a different story," Oschenschlager says. "But in any case, Bush got more than his foot in the door -- he got both feet and an arm in."