Tax Proposals Take Center Stage Early In 108th Congress

By Jeff Johnson | July 7, 2008 | 8:29 PM EDT

Capitol Hill ( - Just three days into the 108th Congress, both Democrats and Republicans began staking out their stances on taxes Thursday, positioning the issue to become a leading topic for debate throughout the coming year.

Sen. Dianne Feinstein (D-Calif.) announced her plan on Thursday to block implementation of tax cuts for Americans whose incomes place them in the uppermost tax bracket, including many small business owners.

"They're not the people that are worried about their IRAs, they're not the people that are going to lose their jobs," Feinstein said. "They're, by and large, affluent, well off, sophisticated."

Sen. Lincoln Chafee (R-R.I.), who described himself as a "centrist," is co-sponsoring the proposal. Chafee said he is not concerned that this first legislative attempt to roll back President Bush's tax cuts might be considered a tax increase targeting successful Americans.

"I think most of the American people when they look at those people," Chafee said, "will say, 'I don't care whether it's a tax increase or a freeze, those people can afford it.'"

The Feinstein-Chafee proposal would block a one percent reduction in the top tax rate from 38.6 to 37.6 percent in 2004 and a second reduction to 35 percent in 2006.

The move would eliminate $88 billion in promised tax reductions between 2004 and 2010 and a total of $132 billion through 2012. Feinstein said the bill mandates that all of the taxpayers' money kept be devoted to reduction of the federal deficit.

Eliminating the Marriage Penalty Tax Faster and Permanently

Under current law, two adults living together receive a standard income tax deduction of $4,750 each, for a household total of $9,500. If, however, those two adults marry, their income tax deduction would be reduced to $7,950. Married couples are effectively penalized $1,550 simply because they are married.

President Bush's 2001 tax cuts began the process of phasing out that so-called "marriage tax penalty." But, under current law, the penalty would not completely disappear for six more years and would reappear when the full tax cut package expires in 2011.

Sen. Kay Bailey Hutchison (R-Texas) was the primary sponsor of the initial effort to have the repeal included in the 2001 bill. Thursday, she introduced legislation to have that repeal take effect immediately and to make it permanent.

"We want to make sure that the doubling of the standard deduction takes place immediately," Hutchison explained, "and we also want to make the Earned Income Tax Credit (EITC) phase out later."

Under the bi-partisan proposal, co-sponsored by Sen. Evan Bayh (D-Ind.), couples would be able to earn an additional $3,000 before losing eligibility for the EITC.

"This is a combination of both tax reform and economic stimulus," Bayh said of the proposal. "Because it targets middle-class families, because it's permanent, and it puts about $574 in the average family's pocket today, it will help the economy.

"But it is also meaningful long-term tax reform," he continued. "I think most Americans understand that it's just not fair to penalize people economically because they happen to be married."

Mostly Partisan Opposition to the Bush Economic Stimulus Plan

While both the Feinstein-Chafee and Hutchison-Bayh proposals claim bipartisan support, Thursday's opposition to President Bush's proposed $674 billion economic stimulus package came almost exclusively from Democrats.

Feinstein said she doesn't know any Democrat that is supporting the president's proposal, especially the elimination of double taxation on investment dividends.

"In my view, this is the wrong plan at the wrong time," she said. "It digs the nation deeper into debt. It is not a stimulus. It is skewed to the wealthy."

House Minority Leader Nancy Pelosi (D-Calif.) also called Bush's proposal "a handout to the wealthy, period."

Chafee, who voted with Democrats against the 2001 tax cuts, opposes the president's latest proposal, as well.

"I can't see us giving away any more of our revenues, which is what we're doing with tax cuts," he said. "Those revenues are important."

But Democrat Bayh said he is willing to consider the idea.

"I've got an open mind on that. I'm not one who would reject that out of hand," Bayh said. "As a matter of theory, most economists will tell you that double taxation of dividends is not a good thing for the economy.

"The question we have to address today is whether that $300 million it would cost over the next ten years is the most intelligent investment of resources at this moment in time to get the economy moving," he added.

Because of the mostly partisan division over the proposal, Hutchison doubts the package will emerge from Congress in its current form.

"Probably not, nothing ever does," she declared. "But we certainly hope to have a bipartisan consensus."

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