WASHINGTON – Majority Republicans have reached agreement in principle on a $70 billion tax relief package that would extend tax cuts on capital gains and dividends for two years and keep 15 million middle income taxpayers from getting hit with a tax designed for the wealthy, GOP aides said late Tuesday.

However, final passage of the measure is being linked by Senate Finance Committee Chairman Charles Grassley to achieving an agreement with House Republicans over the outlines of a second package of tax breaks, according to Republican staffers who spoke on condition of anonymity because the deal has not yet been announced by their bosses.

The agreement was reached among the Republican members of a joint House-Senate conference committee that was appointed to resolve differences between the two chambers on the tax legislation and came after President Bush summoned Republican leaders to the White House Tuesday for a strategy session.

“The president really wants a tax bill,” House Majority Leader John Boehner told reporters.

Tax cuts have been Bush’s signature domestic issue since taking office and the president is pushing Congress to make permanent all his first-term tax cuts.

The two-year extension of the tax reductions on dividends and capital gains, which had been scheduled to revert to their higher levels in 2010, is viewed by Republicans as a key down payment on the larger goal.

Democrats contend the country can’t afford Bush’s tax cuts at a time of record budget deficits and spending on the Iraq war and with the government facing escalating costs for its big benefit programs – Social Security and Medicare – with the pending retirement of 78 million baby boomers.

Since Republicans control both the House and Senate, they are in the majority on the conference committee and can determine the contents of the legislation approved by the panel without the need to obtain Democratic votes. But Democrats complained about being excluded.

Rep. Pete Stark of California, a top Democrat on the Ways and Means Committee, said that the negotiating process had yielded “a Republican agreement that benefits millionaires at the expense of working families.”

The GOP aides said the Republican negotiators expected the disputes on the contents of the second bill to be resolved quickly so that the legislation extending tax breaks for capital gains and dividends can win approval by the full House and Senate.

But that prediction could prove too optimistic, given the struggle lawmakers have already faced in trying to resolve differences in the approach the two chambers have taken to tax cuts.

House Ways and Means Committee Chairman William Thomas has objected to linking the two measures, House aides said, but Grassley, who is serving as the chairman of the conference committee, believes it is important to work out the outline of the second tax bill now, Republican Senate aides said. The tentative agreement on the first bill would provide $70 billion in tax relief by extending for two years the 15 percent reduced tax rate on capital gains – the profits from the sale of assets – and stock dividends.

These tax cuts were due to expire in 2008 but would be extended until 2010.

The tentative agreement also includes a one-year extension to protect many middle income taxpayers from having to pay the alternative minimum tax when they file their 2006 tax returns.

President Bush had made extension of the tax breaks for investors a top priority. He has also called on Congress to make permanent all of his first-term tax cuts, which are now set to expire in 2010.

Without the new legislation, the 15 percent tax rate for capital gains would increase after 2008 to 20 percent and dividend payments would be taxed at marginal tax rates as high as 39.6 percent.

Estimates are that if the alternative minimum tax were not extended this year, almost 19 million taxpayers would pay it, including 15 million who would be paying it for the first time.

The deal on the alternative minimum tax would provide an exemption from paying the tax for married couples earning up to $62,500. That was the exemption level in the Senate bill, which was nearly $3,000 more than the exemption level in the House bill.

The agreement also includes a House provision that would extend for two years an exemption that keeps U.S. businesses from being taxed on business income earned abroad by their foreign subsidiaries until the income is returned to the American parent company. This tax benefit is of particular importance to financial service companies.

Senate Republican aides said that Grassley wants to see a number of expiring tax provisions included in the second tax package, including a popular tax break for business spending on research and development, a tuition tax credit and a tax credit that teachers can earn for spending personal money on school supplies.

Earlier Tuesday, House Majority Leader John Boehner, R-Ohio, had said that Republicans were feeling pressure from the White House to end a months-long stalemate over the tax legislation.

Bush was to give a speech on the economy and taxes on Wednesday.

AP-ES-05-02-06 2205EDT

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