US Congress resorts to tax cuts to help pass bailout

By Richard Cowan

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.