The US Senate has approved a scaled-back $350 billion tax cut package that includes President George W. Bush's proposal to eliminate taxes on dividends but only temporarily.
The Senate approved the bill by a vote of 51-49, with three Democrats joining the Republican majority to support it. Three Republicans voted against it.
The bill eliminates taxes on all dividends in two steps. In 2003, 50 per cent of dividend earnings would be tax free, and then 100 per cent from 2004 through 2006.
But the tax cut would expire in 2007 and dividends would again be taxed at regular income tax rates with a top rate of 35 per cent.
Mr Bush called for eliminating taxes on dividends that are paid out of already taxed corporate profits in a 10-year $726 billion package he said would spur economic growth and create jobs.
The Senate bill contains other elements of Mr Bush's original plan, including accelerating planned income tax cuts, tax breaks for married couples and increases in the child tax credit. It also includes breaks for businesses to encourage more investment in new equipment.
The amendment to temporarily repeal dividend taxes was passed earlier by the Senate on a tiebreaking vote by Vice President Dick Cheney.
The Senate will have to work out its differences with the House of Representatives, which approved a $550 billion 10-year tax cut. The House bill does not repeal dividend taxes. It lowers the top rate on dividends and capital gains to 15 per cent. Most capital gains are now taxed at 20 per cent and dividends are taxed at normal income tax rates.