Nov. 18 (Bloomberg) -- Republicans in the U.S. Congress advanced plans to trim federal spending and extend tax cuts early today as the House passed $50 billion in budget savings and the Senate agreed to $60 billion worth of tax cuts.
The House plan targets Medicaid, food stamps, student aid and other benefit programs and follows Senate passage earlier this month of $35 billion in budget cuts. Negotiators for the two chambers will combine the measures into final legislation.
``If we do nothing tonight spending automatically increases and we have to go to the taxpayers and ask for more money,'' Representative Jim Nussle, an Iowa Republican and chairman of the House Budget Committee, said yesterday before the vote. Failing to extend tax cuts [for the rich] would amount to a tax increase that would hamper economic growth, he said.
The Senate tax legislation would spare 14 million [wealthy] families from paying almost $30 billion in higher taxes next year under the alternative minimum tax. It also contains a $4.3 billion tax increase on oil companies that is opposed by the Bush administration.
Both the spending and tax cuts would be phased in over five years.
Passage came hours after Republican House leaders suffered a setback when lawmakers rejected a $142.5 billion measure setting fiscal year 2006 spending for federal health, labor and education agencies. Some House Republicans said it was defeated because it would have stripped about $1 billion [--only 1% of the total amount--] for special projects in lawmaker's districts.
The tax and budget measures are central to President George W. Bush's effort to cut the federal deficit in half by 2009 and encourage economic growth. Democrats argue that the poor are shouldering too much of the burden of the spending cuts, while the tax cuts mostly benefit the wealthiest Americans and will worsen the deficit. The federal budget shortfall reached $319 billion in the fiscal year that ended Sept. 30.
Capital Gains
The House later today may consider a tax cut worth $56.6 billion over five years, the bulk of which comes from extending the 15 percent rate on dividends and capital gains, which is due to expire in 2008. The Senate assigns most of its tax reductions to preventing the alternative minimum tax from denying popular exemptions, deductions, and tax credits to families with incomes as low as $75,000, and doesn't extend the investment tax breaks.
House passage of the $50 billion in spending cuts, by a 217- 215 vote early this morning, marked the first effort since 1997 to trim increases in spending on benefit programs that grow each year with inflation. The House and Senate may clash over more than the amount of spending cuts as the Senate version includes a provision to open an Alaska wildlife refuge to oil drilling.
Alaska Oil Drilling
Republican House leaders failed to win support from party members for putting the Alaska drilling provision in the budget plan and had to remove it from the House version. They also scaled back cuts to Medicaid, food stamps and a school lunch program to win enough votes among Republican members.
House leaders dropped from a transportation measure the designation of $442 million for projects in Alaska, including one dubbed a ``bridge to nowhere,'' in an effort to gain support for the budget-cutting plan.
The vote is a victory for House Majority Leader Roy Blunt, a Missouri Republican, who is under pressure from Republican lawmakers to prove his effectiveness after replacing Tom DeLay as majority leader in September.
The Senate proposal to impose a $4.3 billion tax on oil companies by denying a favorable accounting rule regarding inventories was overshadowing the larger tax-cutting measure.
Refused to Delete
Senate Finance Committee Chairman Charles Grassley and the tax-writing panel's ranking Democrat, Montana Senator Max Baucus, refused to delete the tax on energy companies even after the White House warned it might veto the measure because of it.
``This provision would result in a retroactive tax increase by changing a long-accepted accounting practice,'' the White House's Office of Management and Budget said in a statement released late yesterday. ``The president's senior advisers would recommend that the president veto the bill if this provision remains in the final legislation.''
Idaho Senator Michael Crapo said that provision ``could bring the entire bill down'' if it is part of a final version voted on later this year.
Accounting Rules
``The accounting rules we have for businesses around the country should be uniform and we shouldn't resort to gimmicks to try to punish a particular sector of our economy,'' Crapo, a Republican, said in an interview yesterday.
Senators added a provision in the closing hours of debate that would penalize companies such as Charlotte, North Carolina- based Wachovia Corp. that have claimed depreciation tax breaks on their leases of publicly funded infrastructure such as sewer systems, rail lines, and air traffic control networks in foreign countries such as Germany and Canada.
The provision would deny future tax breaks from those leasing arrangements, no matter when they were signed, resulting in a $4.9 billion increase in federal tax revenue over the next five years.
Differences
The House and Senate measures differ in other major ways. For example, the House legislation doesn't extend the provision affecting the alternative minimum tax.
The alternative minimum tax, first passed in 1969, was originally designed to prevent the wealthy from avoiding most or all taxes by using exemptions, credits and other income deductions. The tax is not indexed to inflation, so Congress has had to adopt a series of stop-gap measures to blunt its impact on middle-income Americans. The latest such patch is scheduled to expire this year.
