Baucus supports alternative minimum tax change, but otherwise says bill falls (Photo by Office of Sen. Max Baucus)

The Senate has approved a measure that would cut taxes by $69.1 billion over the next decade, including a two-year extension of current rates on capital gains and dividends and relief for some from the alternative minimum tax. Senate passage, which came May 11 on a 54-44 vote, marks the final congressional action on the legislation, It now goes to President Bush, who has said he will sign it.

Most of the provisions affect individuals, not corporate taxpayers, but the changes will benefit small firms, including those in design and construction, that are set up as partnerships and S Corporations. Those types of companies are subject to individual, not corporate, tax regulations.

But it also extends for two years a provision that allows small businesses to write off in the current year purchases of such items as equipment and software, rather than over a longer period of time. This "expensing" provision continues the current $100,000 limit as well as enhancements enacted in 2004.

"The great thing about the bill is just the continuity," says Heidi Blumenthal, the Associated General Contractors' congressional relations director for tax and fiscal affairs. She says that extending the current rates and small-business expensing will allow companies to continue with multi-year equipment-purchase programs, for example.

The big items in the legislation, measured by their revenue impact to the Treasury, include the a two-year extension of the capital gains and dividend rates, now 15% and zero, depending on a taxpayer's income bracket. The Joint Committee on Taxation estimates those two provisions combined will cost the Treasury $50.8 billion over 10 years.

If no extension is enacted, the current capital gains and dividend rates would increase at after Dec. 31, 2008.

The bill also increases the exemption amount for the alternative minimum tax to $42,500 for single taxpayers, from $40,250 now, and also lifts the exemption for those filing joint returns to $62,550, from $58,000 now. That change, which would be effective beginning with the 2006 tax year, would cost the Treasury $31 billion over the next decade, the joint tax committee estimates.

Senate Finance Committee Chairman Charles Grassley (R-Iowa) says the legislation "will assist small businesses, encourage the kind of investment that creates jobs and makes our economy grow and ensure more fair tax treatment for middle-income families who would otherwise be left to pay a tax intended for wealthy individuals."

Sen. Max Baucus of Montana, the Finance panel's top Democrat, was pleased that the alternative minimum tax change was included in the final version. But he added, "Unfortunately, there is little else in this bill to be proud of. Working families have been left behind. Congress has chosen ideological wants over America's needs."

Baucus was unhappy that some other expiring tax breaks didn't make it into the package, such as a deduction for college tuition expenses. But Grassley said he and House Ways and Means Committee Chairman Bill Thomas (R-Calif.) "have an understanding about how other expiring tax provisions will be extended in a second tax bill." Grassley said that would include the tuition deduction and other provisions.