Tax to Offset AMT Patch Appears Unlikely

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Wednesday, December 5, 2007

During the hectic, closing weeks of this session of Congress, leaders of both parties say they are determined to pass legislation that would prevent 23 million middle-income Americans from being hit with a tax increase originally designed to target only the super-rich.

But chances are slim that Congress will find the $50 billion over 10 years needed to pay for that legislation, in large part because a proposed tax increase on Wall Street firms and their managers lacks enough support in the Senate. A sprawling, big-money lobbying campaign appears to have succeeded in preventing the proposed tax increase on hedge funds and private-equity firms.

Yesterday, President Bush repeated his demand that Congress quickly repair the alternative minimum tax (AMT) so the middle-class would be spared an average $2,000-per-family increase on 2007 income taxes and refunds of up to $75 billion could be distributed without delay. The longer Congress dallies in approving the fix, Treasury Department officials warned, the later those refunds will be in coming.

In response, congressional leaders declared that the AMT "patch" was must-pass legislation. "AMT relief is going to get done this year," said Jim Manley, a spokesman for Senate Majority Leader Harry M. Reid (D-Nev.). "It has to pass," agreed Charles B. Rangel (D-N.Y.), chairman of the tax-writing House Ways and Means Committee. "I don't see how anybody, Republican or Democrat, can go back home and point the finger at each other."

But an effort by Reid yesterday to bring the issue to a vote in the Senate failed when Republicans rejected his offer to vote on any one of three specific AMT proposals. He will try to force a vote on the issue as early as tomorrow.

Both parties expressed doubt, however, that enough votes could be mustered to approve tax increases sizable enough to replace the revenue lost from the patch. Republican senators and a growing number of Democrats have been echoing Bush's preference for the AMT to be altered without offsetting tax increases.

Charles E. Grassley of Iowa, the senior Republican on the Senate Finance Committee, said he expected that the Senate would approve an AMT patch soon but that it would be free of offsetting tax increases. "The votes aren't there in the Senate for offsets," he said.

The top Republican on the House Ways and Means Committee, Jim McCrery of Louisiana, agreed: "We're going to end up doing a one-year patch with no offsets."

Since winning control of Congress, Democrats have repeatedly vowed to fix the AMT. They have also said they would adhere to new rules, approved by the Democratic majority, that require any new spending or tax reductions to be paid for with spending cuts or revenue increases. Those rules, however, can be waived if large enough majorities agree.

Last month, the House narrowly approved a 10-year, $73.8 billion measure that would protect middle-income households from the AMT in part by increasing taxes on wealthy Wall Street financiers. The legislation also extended for a single year some three dozen tax breaks due to expire at year's end, including deductions for tuition expenses and state and local sales tax payments.

But the Senate has yet to approve corresponding legislation. The leading version of the bill that Reid tried to bring to a vote yesterday would have patched the AMT without offsetting tax increases. Sen. Max Baucus (D-Mont.), chairman of the Financial Services Committee, has said he doesn't think there are enough Senate votes to offset an AMT patch.

A major reason for that deficiency is the effectiveness of the Wall Street lobby. Private-equity firms, whose multibillion-dollar deals have created a class of super-wealthy investors and taken many large corporations private, hired dozens of lobbyists and stepped up campaign contributions this year. They were retained to protect a special tax rate paid by investment firm managers on their income under a long-accepted interpretation of tax law.

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