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The Honolulu Advertiser

Posted on: Friday, May 23, 2003

Parents will get rebates in tax cut

Advertiser News Services

WASHINGTON — The House passed a $330 billion tax cut early today that will deliver rebate checks to parents and larger paychecks to workers this summer. It gives President Bush less than half the economic stimulus package he wanted but meets his Memorial Day deadline.

"Most unemployed Americans don't want another unemployment check. They want a payroll check and a job," said House Speaker Dennis Hastert, R-Ill. "This bill doesn't go far enough, but it is a strong start."

The House voted 231-200 along party lines for the bill, which cuts taxes $330 billion through the coming decade and sends $20 billion in aid to financially troubled states over the next two years. The bill now goes to the Senate, where it is expected to narrowly pass today.

Democrats said the cut, like two previous ones during Bush's tenure, will saddle future generations with debt.

"This is no victory for people who work every day because eventually this tax giveaway to the wealthy will have to be paid for," said Rep. Charles Rangel of New York, the top Democrat on the House Ways and Means Committee. "You better believe that when the tab comes, it's the working people of this country who will be stuck with it."

The legislation would accelerate reductions in income tax rates that otherwise would not take effect until 2006; this legislation would make them effective retroactive to Jan. 1, 2003, meaning less withholding from paychecks starting this summer. The current rates of 27, 30, 35 and 38.6 percent would drop to 25, 28, 33 and 35 percent, respectively.

Up to 25 million households would get checks of up to $400 per child, perhaps as soon as August, as part of a child tax credit the bill expands to $1,000 from $600.

Much of the overall tax cut, including a six-year reduction in the rate assessed on investment income, would go to the wealthy, who pay the greatest share of taxes and own far more capital assets than do lower-income taxpayers.

The biggest and most contentious portion of the bill would reduce taxes on stock dividends and capital gains. Under current law, dividends are taxed at standard income tax rates up to 38.6 percent. Capital gains are taxed at 20 percent.

The legislation would tax dividends and capital gains at 15 percent for taxpayers in the upper brackets. Lower-income taxpayers would pay a 5 percent tax on dividends and capital gains, sinking to 0 percent in 2008. This entire tax cut would expire at the end of 2008.

In other provisions, the legislation would:

• Expand the 10 percent tax bracket this year and next from incomes of $6,000 to $7,000 for individuals, and from $12,000 to $14,000 for married couples. In 2005, the 10 percent rate's income limits would shrink to current levels, then expand again in 2008.

• Expand the child tax credit from $600 per child to $1,000 for this year and next, then drop to $700 in 2005. The credit would reach $1,000 again in 2010.

• Increase the standard deduction for married persons filing joint returns for 2003 and 2004 to make it equal to what they would pay if single.

• Increase the alternative minimum tax exemption for individuals and joint filers for 2003 and 2004.

• Increase the amount that small businesses could deduct to $100,000 in new equipment purchases, up from the current $25,000, effective immediately through 2005. The bill also would allow for the depreciation of more assets through 2004.

An independent analysis shows that, as a percentage of income, wealthy taxpayers without children would fare better than lower and middle-income taxpayers without children.

For example, the study by the accounting firm of Deloitte & Touche shows that a single taxpayer with an income of $41,000 would get a $211 tax cut. A single taxpayer earning $170,000 would get a $2,743 tax cut, more than 10 times as much.

The distribution for families would be spread more equally, thanks in part to the child tax credit. A family with two children with a combined income of $41,000 would get a tax cut of $1,200; a family with two children earning $170,000 would get a tax cut of $3,148, according to the study.

Some two-year cuts, particularly the business provisions, were designed as short-term boost to the economy, not as long-term tax policy. But the dividend and capital gains provisions were allowed to expire at the end of 2008 only so their costs would fit within the $350 billion limit that was insisted upon by enough senators to stick.

"It's a roller coaster approach," said Sen. John Breaux, D-La., and a member of the Senate Finance Committee. "It may be a good political statement but it's not good tax policy."

In criticizing the bill, Democrats said it would prove too big a drain on the deficit-ridden budget for years to come, even as the government confronts the cost of the impending retirement of baby boomers.

"Under the president's plan, the national debt is going to double — and at the worst possible time," said Sen. Kent Conrad, D-N.D.

Democrats derided the bill's expiration dates for many of the tax cuts, calling it fiscal gimmickry. Few in Washington really believe that Congress would allow the cuts to end, according to the Democrats.

Critics said the true cost of the bill is obscured and could exceed $1 trillion through 2013 if the tax breaks are continued.

Many Republicans, meanwhile, have been disappointed that the tax cut was not larger.

"I like walking in bold steps, but this got to be your average, everyday political compromise tax cut," said Republican Sen. Lindsey Graham of South Carolina.

Knight Ridder News Service, the Associated Press and the Los Angeles Times contributed to this report.