The bill, passed 234-197 along mostly party lines, would keep the 15 percent top tax rate for capital gains and dividends in place in 2009 and 2010, two years after their scheduled disappearance at the end of 2008.
Republicans said tax cuts championed by President Bush have revved up a sluggish economy, and Treasury Secretary John Snow praised the bill's passage, saying, "It would encourage investment and innovation -- the lifeblood of the American economy."
Democrats disagreed and said the tax cuts for investment income, and much of the GOP's economic agenda, exacerbated budget deficits and ignored average workers.
"The poor suffer. The rich benefit. The middle class is paying the bill," said House Minority Leader Nancy Pelosi, D-Calif.
The vote marked the fourth tax bill passed by the House in a week as lawmakers worked feverishly to clear out some unfinished tax work. Lawmakers haven't given up hope of completing some of those tax cuts this month, but it's unclear how much can be done before Congress disbands for the holidays.
The House vote for capital gains and dividend tax cuts sets up tricky negotiations with the Senate, where lawmakers could not muster enough support to insert the extension in their version of the bill. The Senate's GOP leaders vowed to make sure the investment tax breaks make it into the final legislation.
The 15 percent tax rate for investment income is currently scheduled to disappear at the end of 2008. If the reduction runs out, the top capital gains tax rate would be 20 percent and dividends would be taxed like ordinary income at rates up to 35 percent.
Lawmakers hope to at least complete work this month on a much smaller package of tax incentives to lure businesses and jobs back to the Gulf Coast after the region was lashed by hurricanes.
Also on the agenda is an effort to blunt the bite of the alternative minimum tax, which threatens to hit some 17 million individuals and families with higher taxes next year. The House and Senate have passed different versions of that bill, which may not be reconciled before a temporary solution runs out Dec. 31.
The bill passed in the House on Thursday does not only cut taxes on investment income. It also includes some changes popular with both Republicans and Democrats by preserving tax breaks that would otherwise expire in a few weeks.
Some of those evaporating tax breaks are federal deductions for state and local sales taxes, tuition and classroom supplies purchased by teachers. Businesses won extension of two major benefits, a tax credit for research and development and write-offs for investments by small businesses.
The House rejected an alternative tax package drafted by Democrats that would have omitted the tax breaks for investment income but addressed the alternative minimum tax. It also would have replaced $43 billion in government revenue lost to tax cuts by raising taxes on individuals earning more than $500,000 and couples earning more than $1 million.