Fuzzy Math Hits The Senate
Senate tax writers discovered they made a $70 billion error while calculating the cost of a dividend tax cut that is the centerpiece of President Bush's plan to lift a stagnant economy.
Lawmakers found the error as the chairmen of the House and Senate tax writing committees tried to reach agreement on a compromise version of the tax legislation.
House Ways and Means Committee Bill Thomas, R-Calif., said he and his counterpart, Sen. Charles Grassley, R-Iowa, were "near agreement" but wanted to see a detailed analysis of the cost of the framework. "We've made some tentative agreements," Thomas said.
The two houses must reconcile a Senate tax bill, which contains $350 billion in cuts over ten years, and a House version that would slash revenues by $550 billion.
Negotiators also must find common ground on the specific shapes of the cuts.
The Senate, for example, reduces the dividend tax for one year and then eliminates it for three years, before restoring it. But the House plan would tax dividend income and capital gains income at the same, lower rate.
Democrats said the dividend tax mistake threatened to complicate progress on the tax-cut bill. "It shows this was done hastily and not thought through," said Sen. Max Baucus, D-Mont.
The error in the Senate's version of the bill will not be quickly fixed because Senate Democrats refused to give their consent, Grassley, the chairman of the Senate Finance Committee, said Tuesday. "It would have taken 60 seconds to make this correction, but they wouldn't give 60 seconds to save $70 billion," Grassley said.
The error means that a reduction and then temporary suspension of taxes on dividends paid to shareholders, which is contained in the Senate bill passed last week, would cost $194 billion, not $124 billion as previously estimated. The bill calls for halving taxes on dividends this year and would suspend them in 2004, 2005 and 2006.
Analysts traced the $70 billion error to language that suspended taxes on dividends based on accumulated earnings. Lawmakers had intended to make the policy apply only to dividends based on the current year's earnings, meaning the tax cut would have been smaller.
The change pushed the cost of the Senate-passed tax cut to $420 billion, much more than the $350 billion limit that GOP moderates set to control the growth of deficits. Moderates in both parties hold key votes in the narrowly GOP-controlled body.
Spokesman for two of those Senate moderates — Republican George Voinovich of Ohio and Democrat Evan Bayh of Indiana — said their support may waver if the final tax package exceeds $350 billion.
Republican aides said they have considered counting $20 billion in state aid and $27 billion in child credits outside the $350 billion limit because the federal ledger considers both items spending, not tax cuts. That would bring the cost of the package close to $400 billion.
Mr. Bush had asked for a $726 billion tax cut, including a proposal to eliminate what he called the "double taxation" of corporate earnings by giving shareholders a break on dividends paid out of already taxed corporate earnings.
Under pressure to deliver the tax cut to the president before Memorial Day, negotiators worked late Tuesday to start narrowing the differences between the House and Senate bills.
"We're making progress," Grassley said. "I don't think it is our intention to get it wrapped up tonight. It is our intention to make a lot of progress."
The House and Senate agree on most elements in the bill, such as accelerating income tax cuts and reducing taxes for married couples and parents.
They treat taxes on investment income differently. The House opted to reduce taxes on dividends and capital gains to 15 percent, down from top rates of 38.6 percent and 20 percent, respectively.
The Senate voted narrowly to temporarily suspend taxes on dividends. House Majority Leader Tom DeLay, R-Texas, said Tuesday the Senate version was flawed and would "open the doors to corporate America actually paying their employees salaries through dividends with no tax impact."
Rep. Charles Rangel of New York, the top Democrat on the House Ways and Means Committee, came to the same conclusion and warned it could cause a significant reduction in payroll taxes paid to Social Security and Medicare by the employer and employee.
Rangel asked the analysts on the Joint Committee on Taxation to consider possibility of tax avoidance when analyzing the policy. He said corporations might also manipulate the policy to eliminate capital gains tax liability or taxes on interest.
The proposed compromise also drops a $35 billion tax increase on Americans working abroad that caused an outcry among business leaders and many Republicans.
"I do not believe this Congress should raise taxes on some individuals and businesses in order to provide tax relief to others," Sen. George Allen, R-Va., wrote Monday to Senate Finance Committee Chairman Charles Grassley, R-Iowa.