House Panel Backs Tax Measure Offering Breaks for Middle Class

Rep. Charles Rangel says he wants to remove the tax code's looming traps, even if the process is "politically painful." (By Carol T. Powers -- Bloomberg News)
By Jonathan Weisman and Jeffrey H. Birnbaum
Washington Post Staff Writers
Friday, November 2, 2007

The House Ways and Means Committee yesterday approved a $76 billion measure to stave off the growth of the alternative minimum tax and provide new tax breaks to middle-income homeowners and poor parents, proposing to pay for it with hefty tax increases on business executives and Wall Street financiers.

The committee's action was the opening salvo in a fight over the future of the U.S. tax code in the twilight of the Bush presidency, a battle that leading Democrats -- including White House contenders -- have proved singularly reluctant to join. But the insistence of House Ways and Means Chairman Charles B. Rangel (D-N.Y.), coupled with Democratic pledges to pay for any tax cuts they pursue, appears to be forcing the issue.

"We do have a very, very serious problem," Rangel said. He said he is determined to eliminate the looming traps in the U.S. tax code, even if the answer is "politically painful."

The bill that advanced yesterday is but a taste of the bigger struggles to come. When Rangel unveiled a far broader measure, which he called "the mother of all tax reforms," last month, it seemed like a political dream for Democrats -- a blueprint to cut and simplify the taxes of the poor and middle class, eliminate the hated alternative minimum tax that hits high-tax blue states, and pay for it all by soaking the rich.

Instead, Democrats took cover.

"There's a lot of moving parts. So I'm not going to get committed to a specific approach," Sen. Hillary Rodham Clinton (D-N.Y.) stammered during the party's presidential debate Tuesday night.

So flummoxed was the staff of House Speaker Nancy Pelosi (D-Calif.) that, when she initially embraced Rangel, stating, "I certainly support his plan," her aides altered the transcript of her news conference to say, "I certainly support his plan [to begin tax reform]." Pelosi said yesterday that she does, indeed, support the plan.

For a party that is supposed to be on the offensive, the tax code remains treacherous terrain. Even efforts to stave off for a single year the growth of the alternative minimum tax ran into opposition yesterday, and the overall plan has many more hurdles to clear before it can become law.

The alternative minimum tax was designed in the 1960s to prevent millionaires from using loopholes to avoid all tax liability. But later it was not indexed to inflation and, as time passed, increasing numbers of middle-income taxpayers began to be affected by it.

The Ways and Means bill would prevent the AMT from adding to the tax burden of more than 21 million middle-class families this year. It would also extend dozens of tax breaks scheduled to expire at year's end, expand the child tax credit for low-income families, and allow filers who do not itemize their tax returns to claim a federal tax deduction for local property-tax payments.

To pay for the changes, the bill would end deferred compensation plans for hedge fund managers who use offshore tax havens. It would also tax the earnings of private equity and hedge fund managers, most of whom are multimillionaires, at regular income-tax rates, not at the much lower rate on capital gains.

To Democrats, these are common-sense measures to ensure that the rich pay their fair share of taxes. But Republicans say no tax increases are preferable -- a position that is apparently shared in the Senate by Republicans and Democrats alike.

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