Why Your Tax Refund Will Be Late
Habitual congressional gridlock usually has no impact on the lives of ordinary Americans. But what happened on the Senate floor last Friday just before lawmakers left for their Thanksgiving break will delay tax refunds next year for some 50 million taxpayers who count on them.
The underlying reason is a 38-year-old congressional tax blunder that has never been corrected. In 1969, Congress passed the alternative minimum tax (AMT) to collect from 155 tax-avoiding millionaires. But because the scheme was not indexed for inflation, this year alone it would hit 23 million extra people with higher taxes. The AMT will be "patched" to provide relief, as it has been in every Congress, but not in time this year. Refunds totaling more than $75 billion will arrive many weeks late not only for taxpayers earning $100,000 to $200,000 who are unintentionally affected by the AMT but also for lower-income persons because the IRS refund procedure will be disrupted by the delay.
Senate Majority Leader Harry Reid's eleventh-hour effort to fix the problem on Friday collapsed when he refused to open the proceedings to votes on Republican tax-cutting proposals. At the heart of this deadlock is a debate between Democrats and Republicans over whether the level of federal taxation should be controlled. For once, the debate comes home to ordinary taxpayers in the form of delayed refund checks.
The AMT problem did not take Congress by surprise. For months the administration had been calling for another AMT "patch" to keep the monster that Congress built from devouring more taxpayers. But Democratic Rep. Charles Rangel, chairman of the tax-writing House Ways and Means Committee, said that he instead would attempt "the mother of all tax reforms": total repeal of the AMT, with lost revenue paid for by massive taxing of the rich -- a trillion-dollar redistribution of wealth over the next decade.
Rangel's "mother" was going nowhere, so Congress belatedly turned last month to passing a patch. The Blue Dogs, self-styled Democratic fiscal conservatives, insisted on offsets -- $26 billion in tax increases -- to cover lost AMT revenue. Rangel's new bill (called "little mother" by Republicans) hit unpopular targets: private equity accounts, hedge funds and investment partnerships. It passed the House on Nov. 9 on a party-line vote.
Everybody knew "little mother" was pure posturing. There was no chance for the necessary 60-vote Senate supermajority. Indeed, Senate Democratic leaders did not want a tax-increase offset for the patch. The bill that ultimately will reach President Bush's desk will contain no tax increase. Reid said he would not pass a bill until December, when Congress returned from its Thanksgiving break.
But the Internal Revenue Service announced that it would take 10 weeks to readjust its computers to account for the patched AMT, affecting its entire refund system. One $90,000-a-year Senate staffer complained that he would not be getting his tax refunds, and the word spread among his colleagues (who comprise an unregistered, potent lobbyist bloc). Republican lawmakers pounded on the Democrats for inflicting pain on ordinary taxpayers. Prominent Democratic senators urged Reid to get something done.
Consequently, with senators prepared to leave Washington the next day, Reid made a surprise announcement last Thursday. The Senate would take up the AMT patch Friday morning instead of waiting for December. All signs indicated that Reid was serious about taking action.
Grave philosophical differences between Republicans and Democrats prevented passage. Senate Minority Leader Mitch McConnell proposed permitting Republicans to offer four floor amendments to the bill. Reid did not want to subject his Democrats to voting against tax cuts, including repeal of the estate tax. So the two party leaders mutually refused to grant the unanimous consent needed for the Senate to take up the bill, and the senators left Washington with another piece of work undone.
The AMT surely will be patched in December, too late for timely tax refunds. The GOP political reaction was previewed by a Senate Republican Communications Center news release last week titled: "Democrat Delays Put Millions of Middle Class Taxpayers at Risk." But one senior Bush administration official privately expressed fear that Republicans would get blamed. In last Friday's brief Senate debate, Reid said "this man, this man President Bush" caused the trouble by using "credit cards" instead of offsetting tax cuts. He did not reconcile that with his own willingness to fix the AMT temporarily without raising other taxes.
¿ 2007 Creators Syndicate Inc.