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Senate Opens Tax Debate

Conservative Republicans, disappointed in the size and structure of the Senate Finance Committee's tax cut, hunted Wednesday for moderate Democrats who might support eliminating taxes on stock dividends, even if only for three years.

Democrats Blanche Lincoln of Arkansas, Ben Nelson of Nebraska and Evan Bayh of Indiana were the focus of Republican approaches as the Senate opened debate on a scaled-down version of the president's plan.

Nelson said he could support a more aggressive dividend tax cut but will not commit his vote until seeing the final product. Bayh and Lincoln have both said they like the idea of eliminating dividend taxes in principle, but not at the cost of making federal deficits worse.

The Senate's tax writers, working within a budget that limited tax cuts to $350 billion over the coming decade, wrote a bill that proved unpopular with both Republicans and Democrats.

They shrunk the centerpiece of President Bush's economic growth plan — a $400 billion tax cut on dividends paid to stockholders — to an $81 billion tax break. They paid for parts of their package by increasing some taxes and shutting down corporate tax shelters. And they added $20 billion in aid to fiscally strapped states.

"I think this is a great first step," said Sen. Wayne Allard, R-Colo.

The more aggressive dividend plan under discussion makes 50 percent of dividend income tax-free for a year, then makes all dividends tax-free for three years. After four years, the tax break disappears and dividends return to current law and would be taxed as earned income.

The new dividend plan would cost $140 billion, and Republicans propose paying for it by terminating two tax reductions in the bill —
one for married couples and one that allows business to write off more of their equipment investments — in a few years.

That structure could cost Republicans the support of Sen. Olympia Snowe of Maine, who largely dictated the shape of the dividend tax cut during committee debate.

The committee's version eliminates taxes on dividends for 86 percent of shareholders by permitting taxpayers to receive $500 in tax-free dividends. Those with additional dividend income can exclude an extra 10 percent from taxation for five years, then an extra 20 percent for the following five years.

White House spokesman Ari Fleischer on Wednesday did not rule out accepting a temporary elimination of taxes on dividends. "The president is continually pushing for the goal of making these permanent, but given the constraints that we must operate under given the budget resolution, the president will work with what we are working with and make the most progress possible and keep coming at it," he said.

Lawmakers who oppose a tax increase on Americans working abroad want to strip that provision before debate ends. Democrat John B. Breaux, representing oil and gas workers of Louisiana who will see their taxes increase, will try to eliminate the $35 billion tax increase and pay for the change by adding back some taxes on dividends.

Fleischer said the president did not include that tax change in his budget and will consider anything that is "meritorious, what is indeed a loophole closure and not a tax increase."

Members will vote to cement an agreement to divide a $20 billion package of money for states that GOP conservatives want to eliminate completely. The agreement gives states $10 billion to states for Medicaid. The remaining $10 billion will be split, giving 60 percent to states based on their population and 40 percent to local governments.

Democrats will try to double the spending. Sen. John D. Rockefeller, D-W.Va., said states desperately need help with Medicaid. "This is a moral issue. This is a fiscal issue. This is a survivability issue for the states," he said.

The bulk of the bill accelerates planned reductions in income tax rates, cuts taxes for married couples and increases the child tax credit to $1,000 from $600. Small businesses could write off up to $75,000 of their equipment investments.

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