Tax Cuts: See You in September ...

A bipartisan agreement to extend the so-called "middle-class" tax cuts for an additional two years bit the dust last week. Efforts to extend the cuts will now be delayed until Congress returns in September.

The "middle-class" (see related article) tax cuts under discussion are tax reductions for married couples, the new 10 percent tax bracket, and the expansion of the child tax credit. These tax cuts were included in the 2001 tax cut package, but to reduce the costs (on paper at least) they were scheduled to phase out at the end of this year. (If you are confused about the phase-in and phase-out schedule from the 2001 and 2003 tax cuts, Citizens for Tax Justice has produced a handy "cheat-sheet".)

Senate Finance Chairman Grassley (R-IA) had intended to wait until September to attempt extension of these cuts, on the grounds that there would be more urgency (since the cuts expire December 31) that might override concerns about the cost of the cuts. However, after pressure from the White House to pass the tax bill before the Democratic National Convention, House and Senate leaders managed by Tuesday to reach a bipartisan agreement to extend the three tax cuts for an additional two years and fix the Alternative Minimum Tax (AMT) problem for an additional year, at a cost of $80 billion. The agreement included no offsets to pay for the cost, possibly resulting in a "no" vote by Senators Chafee (R-RI) and Snowe (R-ME), but was considered certain to pass and garner at least a handful of Democratic votes. It also would have included an increase in the child tax credit refund for low-income families, which was omitted from the 2001 legislation.

The agreement was touted as a victory for President Bush. Even though Bush had called for a five-year extension, the two-year extension would end during an election year, 2006, and was not seen as much of concession. The five-year extension would cost about $120 billion.

Suddenly, on Thursday, the White House announced in no uncertain terms its opposition to the two-year extension. Apparently, the Administration would rather have a "no" vote on a five-year extension, allowing the blame to fall on Democrats, than a "yes" vote on a two-year extension. As a consequence, the deal collapsed and any extension will be delayed until September.

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