Late Thursday night the U.S. Senate voted to pass a $350 billion tax cut bill aimed at eliminating the double taxation of corporate dividend income, increasing the child tax credit, closing corporate loopholes, and increasing spending for state governments.
Vice President Cheney cast the tie-breaking vote as the Senate passed the bill by only a 51-50 margin.
In a surprise decision that has been labeled by some as a gimmick, the Senate agreed to eliminate income tax on 50% of dividend income in 2003, then the tax on 100% of dividends would be removed in years 2004 through 2006. In 2007 the tax on dividends would be restored. Those opposed to the measure argue that eliminating the dividend tax for only three and one-half years is just a gimmick to keep the total 10-year cost of the bill within the desired $350 billion margin and that it will be difficult for Congress to vote to restore the tax on dividends in 2007, and so the actual cost of the bill will exceed $350 billion if the dividend exclusion isn't removed in 2007.
Those who argue in favor of the short-term elimination of tax on dividends claim the three and one-half year period will give economists a chance to see if the tax reduction is actually increasing investments and spurring the economy. If the dividend tax cut is working, then it will be reasonable to extend the cut beyond 2006. If there is no measurable improvement in the economy, there will be a good argument for letting the law stand and reinstating the tax on dividends at that time.
Other major provisions of the tax bill include:
- An acceleration of the reduction in overall income tax rates that were not scheduled to occur until 2006.
- An increase in the Child Tax Credit from $600 to $1,000.
- A consolidation of the five definitions of "child" that appear in the Internal Revenue Code.
- An elimination of the so-called marriage tax penalty in 2004, then a reinstatement of the penalty in 2005 with a gradual re-elimination of the penalty over four years.
- An expansion of the 10% tax bracket.
- An increase in the Section 179 bonus depreciation deduction for small businesses from $25,000 to $100,000 through 2007.
- An increase in taxes as a result of closing some corporate loopholes such as those used by Enron.
- A prohibition on income tax refunds on corporate overstated earnings.
- An increase in taxes as a result of eliminating the $80,000 income tax exclusion for Americans working out of the country.
- A requirement that corporate CEOs sign company tax returns.
- A prohibition on tax avoidance by companies that relocate their headquarters out of the United States while maintaining most of their operations in the United States.
- $20 billion in aid to state governments over a two-year period including money to help with state Medicaid spending.
Late last week, a similar tax bill passed in the House of Representatives. Now both chambers will work together to produce a single bill that can pass both the House and Senate and that the President will be willing to sign.