Senate and House conferees hope to come to agreement on language for a tax reconciliation bill before the March recess — and to resolve the debate over whether extensions of the capital gains and dividend tax breaks should be included in the bill.
The 2003 breaks on capital gains and dividend tax rates expire at the end of 2008 and would be extended through 2010 under the House version of the bill, which passed December 8 ( H.R. 4297 ).

GOP Senate leaders had hoped to include an extension of at least one year, but that was removed in order to get the bill through the Finance Committee. The Senate bill that was passed on February 2 instead includes relief from the Alternative Minimum Tax (AMT), which is affecting an increasing number of middle-income and upper-middle-income households.

The budget resolution passed last April creates a protected status for $70 billion in tax breaks (protecting the reconciliation bill including this amount in tax breaks from filibuster). The capital gains and dividend tax cuts are particularly regressive, and the Senate probably would not have the 60 votes to survive a filibuster if they were not included in the tax reconciliation bill.

Human needs advocates are demanding the final bill not include capital gains and dividend tax breaks. A two-year extension of the reduced rate would drain about $21 billion from the federal treasury in the first five years and would cost much more in the long run. Nearly half of the benefits from the break (45 percent) would flow to millionaires. A recent report released jointly by the Economic Policy Institute and the Center for American Progress finds that Bush’s tax breaks – such as the reduced rates on capital gains and dividends – have not improved the economy or encouraged more investment: http://www.epinet.org/policy/20060216/bush_growth.pdf **BROKEN LINK**

Senate Democrats have recently thrown up a procedural hurdle to including the capital gains and dividend breaks by threatening to make a point of order that the provision would have revenue implications outside the five-year window covered by the budget resolution. The Joint Committee on Taxation, which scores the 10-year effects of tax bills, has found that even though the bill would only affect tax rates through 2010, it would affect investor decisions with implications for federal revenues for many years beyond that and beyond the period covered by the budget resolution, in violation of budget procedure.

If Democrats were to raise this point of order, it would have to be overridden with 60 votes in the Senate. Since not all the GOP Senators support extending the capital gains and dividend breaks, there probably are not 60 votes to overcome the point of order. Alternatively, Senators could come up with offsets to make up the lost revenue. Republican leaders have generally opposed paying for tax cuts by raising taxes elsewhere. Senate Majority Leader Frist (R-TN) has announced that he will accept a tax reconciliation bill only if it has at least some extension of the capital gains and dividend break, leaving the final outcome uncertain.

During debate on the bill Tuesday, the Senate adopted a non-binding motion by Senator Grassley (R-IA) to instruct the conferees to include the capital gains and dividend breaks as well as AMT relief, which costs $31 billion over five years, in the tax reconciliation bill, along with $15 billion in non-controversial business tax breaks. Grassley argued that revenue-raising provisions should be incorporated with these into the final bill. The motion succeeded by 53-47. Click here for how members voted.

The Senate also rejected by 47-53 a motion by Senator Kennedy (D-MA) to instruct the conferees not to include the capital gains and dividend breaks in the final bill. Click here for how members voted.

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