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Surprise tax cut deal in works

Suddenly, legislation to extend three popular middle-class tax cuts is being eyed as a way to extend other expiring tax breaks, from research credits for companies to credits to promote economic development at ground zero in New York.

Republican tax writers on a joint House-Senate conference committee are seeking to add business tax breaks to a proposal that originally dealt only with middle-class taxpayers.

But the entire effort ran into unexpected roadblocks Wednesday. As a result, Senate Finance Committee Chairman Charles Grassley, who is leading the negotiations, adjourned the conference for several hours of behind-the-scenes negotiations.

The delays stemmed, in part, from problems in developing a Republican response to Democratic efforts led by Sen. Blanche Lincoln, D-Ark., to make sure that some 4-million low-income families, including members of the military, qualify for a refundable child tax credit.

The bill would cost the Treasury $145.7-billion in lost revenue over 10 years, according to a preliminary committee estimate. Some $131.5-billion was covered by extending three tax cuts that are to expire at year's end.

Those measures include the $1,000 per child tax credit, which was scheduled to drop to $700 next year; tax breaks for married couples; and continuation of an expanded 10 percent tax rate that would lower tax bills for virtually all taxpayers. All three provisions are to expire this year.

The conference committee also was considering a $12.6-billion package of 20 tax breaks covering a variety of items from extending tax benefits to support development of the New York Liberty Zone, the portion of Manhattan devastated by the Sept. 11 attacks. Republicans also wanted to extend other tax credits such as one that supports the purchase of electric cars and one that supports production of electricity from biomass materials such as poultry litter.

The biggest corporate tax breaks involved yearlong extension of a research and experimentation tax credit, costing the Treasury $7.56-billion. An additional $419-million in breaks would be set aside to extend a deduction for teachers' out-of-pocket classroom expenses.

Supporters of the collection of tax breaks contended they represented many proposals approved by the Senate or the House in separate tax legislation.

Sen. Max Baucus of Montana, the Finance Committee's ranking Democrat, expressed concern that moving the breaks from the corporate tax bill to the family tax bill could weaken support for the corporate tax legislation, which would repeal an export subsidy that has been ruled a violation of global trade rules by the World Trade Organization.

As long as that subsidy remains in place, Europe is imposing penalty tariffs on 1,600 U.S. manufactured goods and farm products exported to Europe. The tariff, now 11 percent, is increasing 1 percentage point per month.

But Grassley, R-Iowa, said moving the $12.6-billion in corporate tax extenders to the family tax bill could boost chances for approval of the corporate tax package because it reduces its cost.

House Ways and Means Committee Chairman Bill Thomas, R-Calif., said he was committed to getting the corporate tax legislation completed before Congress adjourns in October. He said he believed House Speaker Dennis Hastert, R-Ill., would appoint House members of a joint conference committee on that legislation some time this week.