Tax-cut bill wins final passage

WASHINGTON (CNN) -- A contentious $70 billion tax-cut package awaits only President Bush's signature after the Senate on Thursday passed the measure 54-44, largely along party lines.

The bill extends tax breaks on capital gains and dividends through 2010 and changes the unpopular alternative minimum tax so that it includes 15 million fewer middle-class taxpayers.

The bill, which includes an extension of Bush's 2003 tax cuts, passed the House on Wednesday. It now needs only presidential approval. (Watch how the bill changes IRAs -- 2:13)

Senate Majority Leader Bill Frist, R-Tennessee, said that keeping the tax cuts would help the economy and cited 5.3 million new jobs and 18 straight quarters of economic growth since the cuts were first enacted.

"We will keep taxes low so that we can keep this great country of ours strong and growing," he said.

Democrats, however, had the same major gripe they had in 2003 -- that the cuts amounted to a government handout to the wealthy.

Saying the bill "caters to an elite group of wealthy Americans at the expense of the middle class," Senate Minority Leader Harry Reid, D-Nevada, said extending the cuts was fiscally irresponsible, especially during an era of high budget deficits.

"I've heard, and I always thought, Republicans were the party of fiscal integrity," Reid said. "This has been blown sky high."

But Frist fired back that almost half of the tax returns declaring capital gains and dividends come from people with adjusted gross incomes of less than $50,000.

"It's hard to argue that cutting capital gains taxes benefits only the rich," he said.

Though the vote went mostly down party lines, three from each party crossed over. Democratic Sens. Bill Nelson of Florida, Ben Nelson of Nebraska and Mark Pryor of Arkansas voted for the bill, and Republican Sens. Lincoln Chafee of Rhode Island, Olympia Snowe of Maine and George Voinovich of Ohio voted against it.

Democrats also complained that the tax cut bill, crafted by GOP leaders earlier in the week, did not include extensions of more broad-based tax breaks, including a tax deduction for college tuition and a tax credit for research and development.

However, Congress is expected to take up a second tax bill that might include some of those provisions.

Senate Finance Committee Chairman Charles Grassley, R-Iowa, objected to moving forward with the initial tax cut package until details of the second bill were finalized.

He eventually relented after reaching what he called an "understanding" with House Ways and Means Committee Chairman Bill Thomas, R-California, about extensions of the other tax breaks.

Thomas told reporters Tuesday that "they will all be dealt with." He did not elaborate.

The bill passed Thursday sets the tax rate for capital gains and dividends at 15 percent for most taxpayers through 2010, with low-income taxpayers exempt. Without the extension, the capital gains tax would have returned to 20 percent at the end of 2008, and dividends would have been taxed at the same rate as ordinary income.

The alternative minimum tax -- originally designed to prevent wealthy taxpayers from using deductions, exemptions and credits to avoid paying taxes -- has caught more and more middle-class Americans in its grip because it has not been indexed for inflation. (What is the alternative minimum tax?)

Under the GOP bill, income levels exempt from the alternative tax will increase by about $4,000 for single filers and about $4,500 for joint filers. The changes are expected to spare about 15 million people from paying the higher tax, according to the bipartisan Joint Committee on Taxation.

The bill also includes a provision allowing people with adjusted gross income of more than $100,000 to convert their traditional IRAs to Roth IRAs, something which now is allowed only for taxpayers under that income threshold.

The change is expected to raise about $6.4 billion in revenue over the next decade because people who opt for the conversion must pay taxes on the value of their accounts.

However, critics say the change will reduce revenues in the long term because gains made in the Roth accounts won't be taxed down the road at retirement.

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