The Black Vault - Senate Leaders Seek to Restore Bush Tax Cut

By Donna Smith - WASHINGTON (Reuters) - Senate Republican leaders were expected on Wednesday to try to recover from a serious blow dealt to President Bush's proposed $726 billion tax cut after lawmakers voted to slash it by more than half.

Republican leaders who say Bush's plan will help boost the stock market and create jobs hope they can restore some of the tax cut money in the $2.2 trillion 2004 federal budget the Senate is expected to approve later on Wednesday.

Senate Finance Committee Chairman Chuck Grassley, an Iowa Republican, said there was a "good chance" that the Senate would restore some of the money for Bush's tax cut. Three Republicans broke ranks with their majority to join Democrats on Tuesday in a vote of 51-48 to scale back the tax cut to around $350 billion over the next decade.

A bipartisan group of moderates worried about rising deficits and the cost of war with Iraq led an effort to limit the tax cut.

The White House plans to push for Bush's full tax cut and noted that the House of Representatives included the full amount in their version of the 2004 budget passed last week.

"It's critical that we do everything we can to provide jobs for American workers and to grow the economy," White House spokesman Claire Buchan said.

Republicans say Bush's plan will boost growth that will increase government revenues and shrink budget shortfalls. But a report by the Congressional Budget Office said Bush's plan, which calls for accelerating scheduled income tax cuts and eliminating taxes on dividends paid to investors, may not offer the economic jolt that Republicans forecast.

The CBO analysis, which factored in the economic impact of Bush's budget, concluded that "the overall macroeconomic effect of the proposals in the president's budget is not obvious."

The net effect of Bush's policies were unclear and any impact, positive or negative, would likely be small, it said.

Democrats argue that more tax cuts on top of the $1.35 trillion tax cuts enacted in 2001 will push the government deeper into debt and eventually push up interest rates and thwart growth. They also argue it is unwise to cut taxes when the country is engaged in war that could cost billions.

The move on Tuesday to slash the tax cut came after the White House asked Congress to approve nearly $75 billion in emergency spending to help pay for initial war costs.

ADJUSTING TO THE NUMBERS

Grassley said the $350 billion number would allow Congress to accelerate the 2001 scheduled tax cuts including increasing the child tax credit and give more tax breaks to small businesses on their investments.

There would be little room to eliminate dividend taxes -- the centerpiece of Bush's economic plan.

The Senate setback for Bush's tax cut could delay action on the plan. House Ways and Means Committee Chairman Bill Thomas, a California Republican, planned to have his panel draft the tax cut bill this week. But he said that could be delayed depending on what happens in the Senate on the budget.

If Senate leaders are unsuccessful in their effort to pass Bush's full economic plan, Republican backers try to restore it when negotiators for the Senate and House meet to work out differences in their respective budget bills.

The House last week approved a budget resolution that included the full amount sought by Bush.

But Sen. Max Baucus of Montana, the top Democrat on the Senate Finance Committee said the vote to limit the tax cut showed Bush will have a hard time pushing his full tax cut through Congress in the face of the war with Iraq and rising budget deficits.

"I think the chances are pretty good that this is going to pretty much hold," Baucus said.

(Additional reporting by Andrew Clark)

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