Cap-Gains Tax Cuts: On the Back Burner

The President wanted them extended past 2008, but the raging deficit and potential for a voter backlash likely mean his plan is on hold

By Howard Gleckman

One of President Bush's toplegislative priorities for his second term -- extending tax cuts on capital gains and dividends until 2010 and possibly beyond -- looks like it will have to wait another year, BusinessWeek Online has learned.

Administration officials have been quietly passing the word to business lobbyists and Hill Republicans that they're willing to forgo a vote this year. The reason: strong objections from moderate Republicans and Democrats, as well as a desire to focus this year's budget debate on spending restraint.

In the massive 2003 tax law, tax rates on capital gains and dividends were reduced to 15%, but only through 2008. After Bush's reelection, the investment community hoped they would be permanently fixed at 15%. That dream was shelved last spring. But earlier this year, lawmakers agreed to include an extension of the tax cuts to 2010 in their major budget bill.


  Now rising deficits in the wake of the Gulf Coast hurricanes and the war in Iraq, a growing slugfest over spending, and continued political weakness of the White House have put even those plans in jeopardy. As a result, Congress may delay any decision on the fate of the dividend- and capital-gains tax cuts until 2006.

A White House spokesman says extending the tax breaks remains a top priority of the President, but would not comment on whether Bush aides were warning allies to expect a delay. Senate Finance Committee Chairman Chuck Grassley (R-Iowa) would still like to get the extension done by the end of this year. But House Ways & Means Committee Chairman Bill Thomas (R. Calif.), who has been playing his cards very close, may also be willing to wait.

Backers of extending the tax breaks have what even they concede is a bad PR problem. To help offset some of the cost of hurricane relief, GOP leaders are moving to trim programs such as Medicaid, food stamps, and foster care.


  Congressional GOP moderates are reluctant to support such cuts, which the White House favors. Doing so at the same time Congress extends tax cuts aimed largely at wealthy investors is an even tougher vote for centrists. With no Democrats expected to back the spending changes, middle-of-the-road Republicans fear election-year pay-back.

Divisions among Republicans over spending priorities could sink the entire budget bill this year. Adding controversial cap-gains and dividend tax breaks to the mix will only add to the fiscal gridlock. "There is no reason to do this now," says one key GOP senator usually allied with the White House. "Nothing changes until 2008. This can wait."

Thus, Bush aides are signaling that they prefer that Congress moves ahead on spending cuts, even if it means a delay in extending the '03 tax breaks.

Gleckman is senior correspondent in BusinessWeek's Washington bureau

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