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Citing rebounding economy, House votes to extends tax cuts

WASHINGTON—Shrugging off concern that they'd swell the federal budget deficit, the House of Representatives voted Thursday to extend a series of tax cuts from President Bush's first term, arguing that the lower rates are crucial to sustain a rebounding economy.

The House voted 234-197 for tax reductions that would benefit mainly businesses and investors and would cost the Treasury $56.1 billion over five years. Together with three other tax cuts that the House approved Wednesday, the package would cost the Treasury $94.5 billion over five years, nearly twice as much as the $50 billion five-year spending reductions that the House adopted last month.

Even without these tax reductions, the deficit is projected to total $314 billion in fiscal 2006, according to the nonpartisan Congressional Budget Office. The House tax cuts could make the deficit bigger, even as lawmakers expect to spend perhaps $100 billion more on Iraq next year and billions more in relief to the hurricane-ravaged Gulf Coast states.

The House voted mainly along partisan lines, with Republicans for the cuts and Democrats against.

Democrats accused Republicans of granting the tax reductions primarily to the wealthy only weeks after adopting budget cuts that slowed spending on anti-poverty programs. They portrayed Republicans as Grinches for acting on the twin pieces of legislation so close to Christmas.

"The combination of their tax bill and their budget bill ... is increasing the deficit ... in order to give tax cuts to the wealthiest Americans (and) they are putting the burden of debt on American's children," said House Democratic leader Nancy Pelosi, D-Calif.

Republicans argued that the tax reductions, particularly for capital gains, have spurred the economy, created jobs and generated more revenues for the federal Treasury. Without the extension, the 15 percent tax rate on capital gains would expire at the end of 2008 and rise to 20 percent.

"At these lower tax rates we increased revenues to the federal government," said Rep. Paul Ryan, R-Wis. "Last year revenues went up 14 percent. What happened to the deficit? The deficit projection in 2004 was $521 billion. What is the deficit now? The deficit now is $319 billion."

Treasury revenues rose as the economy recovered, but economists differ on how capital-gains taxes affect economic growth. An analysis last month by the Tax Policy Center, a liberal research institute, said studies showed that during the last 50 years, "capital gains rates display no contemporaneous correlation with real GDP growth."

Brian Riedl, a budget analyst at the Heritage Foundation, a conservative research center, defended the House action, saying that allowing the lower tax rates to expire could place a drag on the economy. "Historically, raising such tax rates has not only reduced economic growth, it has reduced (federal) revenues," he said.

Independent budget analysts complained that the House vote illustrated Congress' inability to cope with deficits and the rising costs of entitlement programs such as Medicare, Medicaid and Social Security.

"The bigger context here is that the fiscal impact of the baby boomers' retirement is just a few years away," said Robert Bixby of the Concord Coalition, a bipartisan fiscal watchdog group. "We're in a fool's paradise."

Riedl of the Heritage Foundation agreed that Congress should confront difficult changes in entitlements. The budget cuts approved so far are "not even a rounding error on our long-term fiscal problems," he said. "Everything on the tax and spending side is just working around the edges of the edge."

House and Senate negotiators still are working out the differences on their respective spending reductions; the House approved $50 billion over five years, the Senate $35 billion over the same period.

Though some House Republicans worried last month about voting to reduce taxes immediately after cutting spending, most of the party's moderates lined up Thursday to support the tax cuts.

The House action sets up a difficult negotiation with the Senate, which passed a different series of tax-reduction extensions last month.

A key component of the House bill is a two-year extension, to 2010, of the lower rates on capital gains—profits from sales of assets such as stocks, bonds or homes—and corporate dividends.

The Senate, under pressure from Republican moderates, kept that provision out of its $57.8 billion tax-cut bill. With little time to work out the differences this year, the House and Senate aren't expected to have a final compromise package until February at the earliest.

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(c) 2005, Knight Ridder/Tribune Information Services.

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