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WHITHER THE 15% DIVIDEND RATE?

September 13, 2005

A report in the Wall Street Journal (subscriber-only link) suggests that the 15% tax rate for dividends and capital gains may be a victim of Hurricane Katrina:

The House and Senate had planned a fall legislative agenda around a massive budget bill that extended to 2010 the 15% tax rate on dividends and capital gains signed by President Bush two years ago. The cut was one of the president's signature initiatives and is seen inside the White House as a key part of his economic legacy.

The 15% rate isn't scheduled to expire until the end of 2008 -- meaning there's still time to push an extension through. But Republicans, chastened by the costs of rebuilding the Gulf Coast and negative public assessments of Washington's initial response to the hurricane, have decided that taking any action on the bill is politically untenable at least until late October in the suddenly changed political and budgetary environment.

The Journal suggests that Congress may punt the capital gain rate extension vote to 2006. The only item the article suggests is a sure bet is an extension of the higher AMT exemption currently set to expire after this year.

Meanwhile, Tax Analysts reports in their subscription-only edition that Senate Finance Committee Chairman Grassley remains committed to the 15% rate - with an important reservation:

While the storm has rearranged some of the Senate's priorities, Finance Committee Chair Chuck Grassley, R-Iowa, remains committed to moving a reconciliation bill that would extend the capital gains and dividend rate cuts, current alternative minimum tax relief, and a number of popular expiring provisions.

"We've still got to find offsets to make it all work," a Finance Committee aide said.

Offsets - there's the rub. The lower rates were enacted with an expiration date to reduce their revenue cost under Congressional budget rules. Now Congress has to come up with tax increases (they seem unable to even imagine spending cuts) to "pay" for continued 15% rates.

ESTATE TAX UPDATE

The WSJ and Tax Analysts also have seemingly conflicting stories on the estate tax. The WSJ says of the estate tax negotiations:

Prospects were already dim for attracting the 60 votes needed to overcome a Democratic filibuster against full repeal. Now there's new impetus behind compromise talks that would preserve the levy for a reduced number of the most valuable estates. Legislative aides in both parties agree that the Democrats' hand has been strengthened in those talks, which include Sen. Baucus, Sen. Grassley and Republican Sen. Jon Kyl of Arizona.

Tax Analysts suggests that Democrats may feel strong enough to walk away from the negotiations, at least for now:

Frist also postponed a vote to repeal the estate tax, and now the top Democratic negotiator on the issue is indicating he is unlikely to continue working toward a compromise.

“We only have so many days left this year and so much is going to be Katrina-, budget-, and tax-related,” said Finance ranking minority member Max Baucus, D-Mont.

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