The US Senate revived the backbone of President George W. Bush's formula for stimulating a laggard economy, narrowly passing a US$350 billion package of tax cuts that would suspend all taxes on stock dividends for three years.
The Republican bill, passed Thursday on a 51-to-49 mostly party-line vote, is less than half the size Bush sought but one that advances previously scheduled reductions in income tax rates, provides US$20 billion in new aid to state and local governments and raises taxes for a few.
Its biggest feature is suspending taxes on stock dividends, a provision added earlier Thursday only after Vice President Dick Cheney was called to break a 50-50 tie on the issue.
Treasury Secretary John Snow called the Senate's action on dividends a "bold step," saying it "will have a profoundly positive effect on job creation, corporate governance and the well-being of all Americans."
Senator Charles Grassley, a Republican and chairman of the Senate Finance Committee, said he hoped to begin negotiations next week with the House, which this month passed its own package of US$550 billion in tax cuts through 2013.
Bush had asked Congress to abolish taxes on dividends paid to investors at a cost of US$400 billion over the next decade, arguing that corporate profits are now effectively taxed twice, once at the corporate level and again by stockholders on the dividends paid to them.
The House instead voted to reduce the top rate, as well as capital gains, to 15 percent. Dividends and capital gains are now taxed at a maximum rates of 38.6 percent and 20 percent respectively.
The Senate bill chops dividend taxes in half this year, suspends them entirely in 2004, 2005 and 2006, and restores them in 2007, at a total cost of US$124 billion.
Democrats derided the dividend tax suspension, saying it would come at the expense of married couples whose tax breaks were scaled back.
The Senate bill still has to be merged with a $550 billion package of tax cuts passed last week by the House, where Republicans rejected Bush's proposal to eliminate dividend taxes. Instead, the House voted to cut the maximum tax rates on both dividends and capital gains to 15 percent. Those maximum rates are now 38.6 percent and 20 percent respectively.
The Senate had to work within a budget passed last month that limited tax cuts to US$350 billion through 2013, forcing Republican tax writers to scramble for new sources of revenue.