Senate gives middle class tax cuts priority

WASHINGTON (Reuters) - The U.S. Senate on Wednesday overwhelmingly agreed to give popular middle class tax breaks top priority for renewal should the budget plan currently being debated produce a surplus in five years.

An amendment approved by the Senate on a vote of 97-1 would devote surplus funds to children's health care and making permanent the child tax credit and other popular tax breaks. It was added to the $2.9 trillion fiscal 2008 budget blueprint being debated by the Senate in an effort to shore up support for the plan.

"Our amendment says that the Senate's highest priority for any surplus should be American families," said Senate Finance Committee Chairman Max Baucus, a Montana Democrat.

If a surplus materializes, the measure would make permanent the 10 percent income tax bracket, marriage penalty tax relief, the refundable child tax credit and the adoption tax credit.

It also would give funding for a children's health care program top priority, give U.S. combat soldiers a tax break and provide for estate tax reform that Baucus said would protect most small farms and ranchers.

The budget anticipates a $132 billion surplus in 2012, but lawmakers still would be tapping into surplus Social Security funds to help achieve budget goals.

Republicans said the Democratic-written budget would set the stage for a huge tax increase when President George W. Bush's tax cuts expire at the end of 2010 and offered their own list of priorities. These include extending capital gains and dividend tax breaks and estate tax reform.

Sen. Lindsey Graham, a South Carolina Republican, said the measure would make sure the budget plan does not deal a "death blow" to tax cuts Republicans say promote economic growth. But Senate Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said the measure would push the budget into deficit.

The Senate rejected the Republican measure on a mostly party-line vote.

The budget blueprint sets up overall spending and revenue goals. But it will be up to individual committees to determine where the money goes and any tax cut extensions would also be subject to committee and congressional approval.

The Senate is expected to vote on the budget by the end of the week. As senators argued over spending and tax priorities, the House Budget Committee was in a marathon session to produce its version of the non-binding resolution.

Democratic Rep. John Spratt of South Carolina, the chairman of the House panel, portrayed his measure as being "in broad principles consistent" with the Senate Democrats' approach.

While Senate Democrats worked to win support for passage of their budget plan this week, Spratt said he was optimistic his will pass the House, probably next week.

The House Budget Committee was trying to finish writing that budget by late on Wednesday.

(additional reporting by Richard Cowan)