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A package of tax cuts for individuals and businesses aimed at spurring economic recovery grew to more than $340 billion, as it won approval by the Senate Finance Committee Tuesday.

The panel backed the measure on a 14-9 vote, with all Republicans opposing it except for Sen. Olympia Snowe, R-Me. The Senate could vote on broader legislation that also includes infrastructure and other spending by this weekend.

The most significant addition to the bill was a $70 billion, one-year provision to protect most middle-income taxpayers from the alternative minimum tax in 2008. That could push the cost of the overall Senate package above $900 billion, and sets up a negotiation with the House, which rejected including the AMT patch in its version of stimulus legislation.

At its core, the bill approved by the Senate Finance panel today is similar to the tax provisions in a plan now pending before the House of Representatives. It would provide a $500 credit against payroll taxes to all but the wealthiest 5% of Americans, a key Obama campaign proposal. The Senate bill would cut taxes for businesses by allowing quicker depreciation of equipment, and help businesses convert losses into tax refunds by allowing them to use current year losses to offset tax liability as far back as five years.

Like the House bill, the temporary 5-year loss carryback provision would not be available to recipients of Treasury Department bailout funds. The Finance panel rejected, 9-14, an amendment from Sen. Jim Bunning, R-Ky., to let bailout firms claim the tax benefit.

The Senate loss provision is a little more generous than the House version, which would reduce eligible losses by 10%.

In total, tax benefits for businesses reach $25 billion over 10 years in the Senate bill, compared to $20 billion in the House legislation.

"We think that the provisions in this bill represent the best ways to address spending slowdowns and rising unemployment," Baucus said at the committee session.

Divvying Up The Pot

The bill also boosts federal Medicaid payments to states by $87 billion. Baucus steered around a contentious debate among Democrats regarding how that pot of funds is divvied up, but the issue is likely to surface again when the bill comes before the full Senate.

The fight pits rural states against more populous ones that have seen more dramatic increases in unemployment. Under the Senate bill as originally proposed by Baucus, 60% of the Medicaid payments would have come from a flat 5.6% increase in federal payments to each state. The remaining 40% would be distributed according to a formula that favors states that have seen the largest increases in jobless rates.

That is already kinder to rural states than the House Medicaid provision, which reflects a 50/50 split.

Sens. Jeff Bingaman, D-N.M., Kent Conrad, D-N.D., and others sought to eliminate the second, formula-based part and distribute the whole pot of $87 billion by the same percentage increase across the board.

"My hospitals are going right down the drain, because they are getting half as much money as the big states in this country," said Sen. Kent Conrad, D-N.D.

Retorted Sen. Robert Menendez, D-N.J., "We would love not to be in the position of having higher unemployment rates than other states."

Baucus persuaded committee members on a provisional compromise of 80% distributed based on percentage increase and 20% tilted to states hit harder by the recession. That 80/20 split was added to the bill. But panel members indicated they will revisit that debate on the Senate floor.

Canceled Debt Tax Break

The Finance panel agreed to sweeten a tax break for businesses that buy back debt, similar to a change sought by firms including U.S. Chamber of Commerce and companies including Dish Network Corp. (DISH), Lennar Corp. (LEN), Qwest Communications International Inc. (Q), and Tenet Healthcare Corp. (THC).

Those firms wanted a two-year suspension of taxes on income recognized because of canceled debt. Such income could arise as firms repurchase shares to shore up their balance sheets.

Instead, the revised Senate bill would allow them to spread recognition of that income over eight years. That is up from four years in the bill as introduced last week. The House bill does not grant businesses relief on the debt cancellation income.

The debt repurchase provision may undergo further changes by the time the bill passes the full Senate.

Sen. John Ensign, R-Nev., said that provision did not go far enough to help businesses restructure debt, and criticized the bill for not doing enough to address housing directly. "I believe this 'mark' has missed the mark," said Ensign.

Sen. Kent Conrad, D-N.D., proposed suspending taxes on half of such income from cancellation of indebtedness, and spreading the rest over an eight-year period. He said he hoped to discuss the change further with Baucus prior to Senate floor consideration.

First-time Homebuyer Credit

In another difference with the House approach, the Senate bill would extend the period for first-time home buyers to qualify for a tax break. Under last year's housing legislation, first-time home buyers that purchase homes before July 1, 2009 can qualify for a $7500 tax credit, which they must repay to the federal government over 15 years.

The bill approved by the Finance Committee would extend eligibility for the credit to homes purchased before Sept. 1, 2009, and would waive the repayment requirement for homes purchased between Jan. 1 and Sept. 1, 2009.

The bill would spend $31 billion over 10 years for investment in renewable energy, including a 3-year extension of production tax credits for wind, geothermal and biomass energy.

Democrats turned back GOP amendments to boost tax benefits for wind energy, and alternative fuels. Under Democratic-imposed budgeting rules, each amendment must to be offset by raising revenue or reducing spending elsewhere in the bill. Republicans proposed reducing funding to state Medicaid programs to fund their proposals, which Democrats objected to.

Besides tax and state aid provisions, the bill would spend $27 billion to help workers who are laid off retain COBRA health-insurance coverage. It includes $39 billion to extend and augment unemployment benefits and $4 billion for welfare and child support programs.

-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@dowjones.com

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