Another AMT Patch For 1 Year Is Likely To Aid Middle Class

The House is set to vote Thursday to lift the Alternative Minimum Tax exemption for joint filers to $66,250 from $62,550 -- but only for a year.

How, or even if, they expect to pay for the patch -- an estimated $50 billion -- is another question.

House Democrats hope to spare millions of middle-class taxpayers from the AMT, a special tax aimed at the very wealthy, but keep it revenue neutral. Republicans and even some Senate Democrats are balking at that.

House leaders are in a tough spot. They vowed early on they would bring fiscal discipline. Now they'll have to take the heat for raising taxes or breaking their own pledge.

It also foreshadows an even larger fight the House is likely to have over a complete repeal of the AMT that Rep. Charlie Rangel, D-N.Y., chairman of the tax-writing Ways and Means Committee, is pushing. That likely won't happen until 2009, when Democrats hope to control the White House.

Trimming The Hedges

The proposed House bill would raise almost $78 billion in new revenue. Mainly, it would hike tax rates on hedge fund managers. Their profits, called "carried interest," are taxed at the long-term capital gains rate of 15% rather than as ordinary income. The bill would also sharply limit hedge funds' ability to defer offshore compensation.

House Majority leader Steny Hoyer, D-Md., defended the patch bill Tuesday.

"We pay for it by closing tax loopholes that allow the privileged few to pay a lower tax rate than others," Hoyer said, but added later, "We are not locked into how we are going to pay for it."

No Need To Be Neutral

Republicans like Rep. Jeff Flake of Arizona counter there's no need for a revenue neutral patch. The AMT essentially raises taxes each year by affecting more people.

"It's paying for a tax hike with another tax hike," Flake said.

Prior Congresses passed patches that weren't revenue neutral, just foregoing the extra AMT revenue.

House leaders must offset any tax cut or revenue loss under their "paygo" rules, but Senate lawmakers face no such rule. So while the bill may pass the House handily, Congress is still far from a deal.

Some key lawmakers, like Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, have said the "carried interest" provisions just won't get enough support and should be scrapped.

Senate Majority Leader Harry Reid, D-Nev., said Congress won't send an AMT bill to President Bush until at least December.

That means tax forms will be printed late, delaying refunds to millions of taxpayers.

Congress created the AMT in 1969 to ensure the very rich could not use tax breaks to avoid paying anything. Many deductions and credits, including state and local taxes, don't apply under the AMT.

The tax was not indexed to inflation and in recent years has increasingly hit the middle class. This year more than 21 million new taxpayers could see their average tax burden rise by $2,000.

Congress has tried for years to repeal the AMT but stumbled over the revenue issue. A 10-year repeal has been pegged at $800 billion -- and it goes up every year.