Senate passes bill extending tax cuts

WASHINGTON — The Senate gave final approval Thursday to a five-year, $70 billion tax package that would extend deep cuts to tax rates on dividends and capital gains for two years, effectively locking in all of President Bush's first-term tax cuts through the end of the decade.

On a 54-44 vote, the Senate approved the sixth tax cut in the past six years.

Washington state's senators, Maria Cantwell and Patty Murray, both Democrats, voted against the measure.

The House approved the package Wednesday, and Bush said he will sign it once it reaches his desk.

But with interest rates rising, the dollar falling and the budget deficit stuck at about $300 billion, tax experts warn that the tax code Bush has transformed may not survive to its Dec. 31, 2010, expiration date and that Congress may have to step in again because tax revenue will not meet all of the government's needs.

"We have a train wreck waiting to happen," said C. Clint Stretch, director of tax policy at the accounting giant Deloitte & Touche.

Even some of the tax cuts' strongest supporters concede the tax code as written could not generate sufficient revenue to support the retirement programs during the coming crush of baby boomers.

"You cannot grow your way out of these deficits," said Senate Budget Committee Chairman Judd Gregg, R-N.H. "In order to address the long-term entitlement problem, we're going to have to do major structural reform, and it's going to have to be comprehensive," targeting taxes and spending.

The measure would extend the president's 2003 investment tax cuts to 2010, two years beyond their original expiration date. It would save more than 15 million Americans from the alternative minimum tax. And it would provide a variety of other tax breaks: to Nashville recording companies, song writers, Great Lakes shippers and the University of Texas, among others.

A recent surge in tax receipts has given Republicans cause to crow that their tax cuts — $2 trillion in all over this decade — have stimulated the economy and have, at least partially, paid for themselves. As Sen. Robert Bennett, R-Utah, put it, "rivers of cash" have pushed tax receipts through April to $1.35 trillion, up $137 billion or 11.2 percent compared with this time last year.

"We've put these tax provisions in place, and they've raised money," said Sen. Rick Santorum, R-Pa.

Bush has not received what he has demanded for years, a permanent extension of his tax cuts. But Congress has largely given him the tax code he has asked for. Although the tax system remains fundamentally unchanged, relative tax burdens within that system have been shifted, Stretch said.

The biggest winners have been middle-income couples with children, who have seen income-tax rates cut, their child tax credit doubled, and income-tax rates adjusted to favor marriage. Affluent investors and savers have also done well, seeing rates on most capital gains reduced from 20 percent to 15 percent, rates on most dividends reduced to 15 percent from as high as 38.6 percent, and limits on tax-protected individual retirement accounts and 401(k) plans raised substantially.

The big losers are middle-income singles with no children, who have been left "with very substantial penalties at a time when the population is aging and more and more people are going to be single, not because they don't believe in marriage but because their spouses died," Stretch said.

Material from The Associated Press is included in this report.