House Passes Bill to Ease Alternative Minimum Tax

By Jonathan Weisman
Washington Post Staff Writer
Saturday, November 10, 2007

The House yesterday narrowly approved a $73.8 billion measure to protect millions of families from the alternative minimum tax and offer new tax breaks to middle-income homeowners and low-income parents, offset by tax increases that would land primarily on wealthy Wall Street financiers.

The 216 to 193 vote came after a fiery debate that divided Democrats and energized Republicans, who assailed proposed tax increases that Rep. Sam Johnson (R-Tex.) called "an assault on free enterprise." Democrats countered that they were only closing tax loopholes on super-rich private-equity and hedge fund managers in order to live by a pledge of fiscal responsibility.

"We planted the flag for fiscal responsibility . . . as we gave a tax cut to the middle class," said House Speaker Nancy Pelosi (D-Calif.).

But the hours of open class warfare on the House floor made clear how difficult it has become for Democrats to abide by rules they passed this year to pay for tax measures and new programs with corresponding tax increases or spending cuts. With the Internal Revenue Service nearing its deadline for completing this year's tax forms and with the Senate balking at similar tax boosts, the political demand for a quick fix for the alternative minimum tax could still spell the demise of the Democrats' pay-as-you-go, or "paygo," promise.

"There's no doubt that Congress will complete work this year on an AMT patch that will protect those who don't pay the tax now from being hit," Senate Finance Committee Chairman Max Baucus (D-Mont.) said after the vote, without mentioning how it would be paid for. "Millions of American families are counting on us to act, and we will."

But Baucus said this week that it is unlikely he could get the 60 votes he would need to pay for an AMT patch with the same tax-increase provision. The White House has also issued a veto threat, so yesterday's vote was for a tax increase that is not likely to be enacted.

Senate Majority Leader Harry M. Reid (D-Nev.) has put off the issue until after Congress's Thanksgiving recess, but he has pledged to pay for an AMT patch. He has suggested that the offsetting tax increases may fall on different targets.

Sen. Charles E. Schumer (N.Y.), chairman of the Democratic Senatorial Campaign Committee and a key member of the finance and banking committees, continues to say he would support an increase in taxes on partnerships only if its sting fell on more than just the hedge fund and private-equity industries.

"We should not single out just one industry," Schumer said Thursday.

For several years, Republican-led Congresses have approved temporary "patches" to stave off the increasing reach of the alternative minimum tax, a parallel tax system enacted in 1969 to ensure that 155 super-wealthy families paid at least some income taxes.

But because the law did not ensure that the AMT's income threshold would rise with inflation, the tax now hits 4 million U.S. families, and without congressional intervention it will affect 23 million more, mainly those with upper-middle incomes, this year.

Taxpayers are not struck by the AMT based on income alone. The number and type of deductions and credits they take, as well as the level of their state's taxation, also help determine whether they will be forced into the alternative taxation system.

Because a full repeal of the tax could cost more than $1 trillion, both parties have opted for a temporary fix for the AMT.

But this year, Democrats added additional measures that offer a mortgage interest deduction to families that do not itemize their deductions and expanded tax rebates to working parents too poor to pay the income tax.

They would offset the cost largely by plugging a tax loophole that has been exploited by the burgeoning private-equity and hedge fund industries.

Private-equity fund managers earn much of their compensation by taking a cut of the earnings of the limited partners who invest in their funds. It is pay for work, N. Gregory Mankiw, a former chief economist for President Bush, has said. But it is taxed as capital gains, at 15 percent instead of the 35 percent income tax rate that they would otherwise pay.

"The tax subsidy each year to private-equity fund, hedge fund and venture capital fund managers is in the billions of dollars," William D. Stanfill, founding partner of Trailhead Ventures in Denver, told the Senate Finance Committee this summer. "But I think this special tax break is neither fair nor equitable."

Rep. John B. Larson (D-Conn.) said fewer than 50,000 households would claim this special tax rate. They collectively earn $935 billion, an average household income of $18.7 million.

But Republicans -- and a scattering of Democrats -- focused on the collateral damage, small real estate partnerships that spin off much smaller income, and whose partners vote in business-friendly districts throughout the country.

"I live in a community where these little partnerships are all over the place, and I know how these guys think," said Rep. Tim Mahoney (D-Fla.). "And I'm telling you right now, they're saying this is a tax increase, and they're saying this is Democrats being Democrats."

For the conservative "Blue Dog" Democrats, the bill was a particular quandary. They have long championed "paygo" rules demanding that Congress offset the costs of tax measures and new spending, calling themselves the new stewards of fiscal discipline. But they hail from districts where tax increases do not sit well. Yesterday's vote pitted their pledges of fiscal discipline against their political promises to stand against tax increases.

"We have led on paygo, and if we're going to lead on paygo, we need to practice what we preach," said Rep. Baron P. Hill (D-Ind.), a leading Blue Dog. "And while it may have been a difficult vote for a lot of Blue Dogs, it was the right vote."

Rep. Jim McCrery (La.), the ranking Republican on the House Ways and Means Committee, reasoned that Congress is simply trying to keep the taxes of 23 million families from going up. Since that is not really a tax cut, he said, its $52 billion cost to the Treasury should not be paid for. Besides, he said, the AMT was never meant to hit the middle class.

"Why don't we just admit the mistake and get rid of it?" he demanded.