US Congress resorts to tax cuts to help pass bailout

WASHINGTON Wed Oct 1, 2008 1:09pm EDT

WASHINGTON Oct 1 (Reuters) - Leaders in the U.S. Congress have deployed their best weapon for winning passage of a $700 billion financial industry bailout just weeks before the elections, attaching tax cuts to an otherwise bitter pill.

The Senate aims to vote at some stage on Wednesday evening, after 7:30 p.m. EDT/(2330 GMT), on a retooled bill allowing the federal government to buy bad debt held by Wall Street that is threatening to sink the global economy.

If the bill passes the Senate, the House of Representatives is "likely" to vote on Friday on the new version of the bill, a senior House Democratic aide said on Wednesday.

Besides adding tax sweeteners to the bill, another provision is being tacked on to soothe voters worried about losing their life's savings: the federal government would increase its bank-account insurance to $250,000 per account, up from $100,000.

The measure would come as three of the biggest U.S. banks have succumbed to the crisis in recent months, with more teetering before the Nov. 4 presidential and congressional elections.

Senate Majority Leader Harry Reid, a Nevada Democrat, opened the Senate session on Wednesday pleading for passage.

"I'm hopeful tonight that we'll see a strong vote in support of this plan and that bipartisanship shown here in the Senate today will spark the House to do the same" in coming days, he said.

It was the House's unexpected refusal to pass a stand-alone bailout bill on Monday that ignited the historic 778-point drop in the Dow Jones Industrial Average, a benchmark for the U.S. stock market.

Democrats control both chambers in Congress, but need Republican support to push through the bailout -- proposed by Republican President George W. Bush's administration to avert what the administration says would be a deeper financial crisis.

To try to secure bipartisan support for the bailout in both chambers, Republican and Democratic leaders have found some sweeteners to lure more members of each political party to get behind the bill.

Sketching out those sweeteners, Reid spoke of renewing a package of tax cuts that have expired or are about to expire for the middle class, small businesses and entrepreneurs working on renewable energy projects, which would be attached to the bailout.

MAIN STREET, NOT JUST WALL STREET

Besides keeping tax rates lower for the middle-class, Reid said the other provisions "will create hundreds of thousands of jobs here in the United States," sparking investment in small and large businesses."

Congress was determined to renew these tax breaks anyway, in time for next April's tax filing season.

But an election-year tax cut is likely to cheer voters and to lessen the pain felt by taxpayers spending $700 billion to fix mistakes by Wall Street executives.

Beyond the tax cuts, congressional leaders were working broadly to convince voters that the bailout is for "Main Street," not just Wall Street. The House defeat of the bill was triggered by an angry stream of voter complaints.

"This isn't for lower Manhattan," the home of the U.S. financial district, Reid said.

Instead, unlocking the spreading credit freeze will help "people keep their jobs ... buy a car ... be able to get a loan for that car," Reid added.

Senate Minority Leader Mitch McConnell, the Kentucky Republican who has seen some of his recent re-election poll numbers sink amid the growing economic crisis, delivered a basic economics lecture on the Senate floor, with an eye to convincing voters.

ECONOMY: A HUMAN BODY WITH PROBLEMS

"Our whole economy you could think of as the human body and the credit markets as the circulatory system. Right now ... the credit markets are frozen so the circulatory system is not working as it should. If the circulatory system doesn't work, it begins to choke off the body, the economy," McConnell said.

The $700 billion bailout was just what the doctor ordered, McConnell said. "We're confident we'll be able to restore the circulatory system," with the bill, he said.

Two of the Senate's biggest guns: presidential candidates Barack Obama, a Democrat, and John McCain, a Republican, will take a break from their campaigns to vote for the bill.

"It is clear that this is what we must do right now to prevent a crisis from turning into a catastrophe," Obama told a rally in La Crosse, Wisconsin.

McCain, in Independence, Missouri, also embraced the latest plan, saying, "If the financial rescue bill fails in Congress yet again, the present crisis will turn into a disaster."

House Speaker Nancy Pelosi has been working to back up that message for voters, reminding them that if everything goes well, the legislation could end up making the government, and thus taxpayers, money. This is a "buy-in," not a bailout, she argues.

(Editing by Frances Kerry)