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Thomas Floats Cap. Gains Cut

Ways and Means Chairman Bill Thomas (R-Calif.) is honing a plan to replace the centerpiece of President Bush’s tax package — a $396 billion cut in dividend taxes — with a slimmer plan that would trim the top rate of dividend and capital gains taxes to 18 percent.

The plan would slice $162 billion from the overall $726 billion package originally backed by the White House, leaving it just a hair over the $550 billion cap imposed by House leaders earlier this month.

“In a perfect world, they want $726 billion, but we have to squeeze it to $550 [billion] and there are only a limited number of ways we can do that,” said Ways and Means spokeswoman Christin Tinsworth. “This gets us in the ballpark.”

The latest Thomas plan comes as Congressional tax writers pick among the remnants of Bush’s original tax plan in order to craft bills that can move through the House and Senate in the next four weeks.

Though Tinsworth said the latest plan would let the president “keep most of what he wants,” the White House and a broad-based business coalition will press Thomas to retain the original provision that would strike down the entire tax on dividends.

“We are talking to [Thomas] and the White House is talking to him,” said Jade West, a lobbyist with the National Association of Wholesale Distributors, who runs the industry coalition.

Thomas continues to consider other alternatives, his office said, including a plan to strip a popular small-business expensing provision from the underlying tax bill.

But tax lobbyists believe Thomas has settled on the broad outlines of his bill.

Under the latest plan, Thomas would retain provisions to accelerate the administration’s 2001 cuts in personal income tax rates, eliminate the marriage penalty and boost the child credit — each of which was included in Bush’s original proposal.

But Thomas would gut the White House’s dividend tax cut elimination by replacing it with twin cuts in the capital gains and dividend tax rates.

The plan, dubbed “8-18,” would reduce the capital gains tax rate to 8 percent for the lowest two income brackets and 18 percent for higher earners.

Dividends, now taxed at the same rate as personal income, would be taxed at 18 percent as well.

Ways and Means Committee aides put the total cost of the 8-18 plan at about $234 billion over 10 years, down from the $396 price tag for the total elimination of dividend taxes.

In a letter sent Monday to Thomas and other members of the tax-writing panel, business leaders said the elimination of the dividend tax “is achievable and would have a singularly positive impact on the economy in both the short term and long term.”

The letter was signed by the 11 founding members of the industry-run Tax Relief Coalition, including John Castellani of the Business Roundtable and Dan Danner of the National Federation of Independent Business.

White House aides are not happy with the Thomas plan either and plan to meet with him this week to stress the importance of the full-fledged dividend tax cut.

Privately, however, several business lobbyists said the Thomas plan could present a solid compromise as they work to enact a tax relief package this summer.

“It’s not what the president is looking for, but of all of the compromises out there, it’s the one that continues to push toward [the] abolition” of taxes on dividends and capital gains, said one lobbyist who supports tax cuts.

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