Facing tightening budgetary constraints, Sen. Charles Grassley (R - Iowa) has proposed a one year extension to the dividend and capital gains tax cuts passed as part of President Bush's growth package in 2003 - one year less than the White House is pushing for.

The reduced rates, currently 15%, are set to expire at the end of 2008 under current legislation, and the Bush administration and most Republicans have made it a priority to extend them to 2010. Without action, dividends would be taxed at personal income rates as high as 35% beginning in 2009, while rates on capital gains would rise to 20%.

However, by curtailing the length of time that the tax cuts are extended by a year, Mr Grassley could make savings of around $10 billion which could be used to offset spending elsewhere, as Congress attempts to meet the cost of the post-hurricane clean-up on the Gulf Coast, as well as the ongoing cost of military operations in Iraq and Afghanistan.

Also included in the $70 billion five-year tax cut bill by Mr Grassley are several tax incentives for business, including: an extension to the research and development tax credit at a cost of $7.1 billion; accelerated depreciation on equipment for corporations at a cost of $7.3 billion; and $590 million in incentives to encourage the hiring of low-skilled workers.

In addition, there are $4.1 billion in incentives to encourage those on low incomes to save for their retirement; and a $2.1 billion plan allowing taxpayers to deduct state and local taxes.

Furthermore, the bill includes a one year fix to the Alternative Minimum Tax at a cost of $27.2 billion, and in this respect, Grassley's bill could come into conflict with tax cut proposals being drawn up by House Ways and Means Committee Chairman Bill Thomas (R - Calif).

Last week, Thomas advocated dropping the one-year AMT fix from the tax cut bill - not only to leave room for a two-year extension to the dividend and capital gains tax cuts, but also to provide an extra impetus for the White House and Congress to drive through tax reform proposals recommended by President Bush's tax reform panel.