Alternative-tax "patch" in jeopardy
WASHINGTON — For the first time since 2001, it's not clear that Congress will pass an annual temporary "patch" in time to prevent the creeping alternative minimum tax (AMT) from forcing up tax payments for millions of unsuspecting middle-class taxpayers.
In addition, if Congress doesn't "patch" the AMT tax next week — and it appears highly unlikely to do so — partisan bickering among lawmakers could delay tax refunds next year for tens of millions of Americans.
The Democrat-controlled Congress pledges to do as Republicans have done in recent years and prevent the AMT from hitting an additional 19 million taxpayers. About 4 million tax filers paid the AMT on 2006 income.
The House voted 216-193 Friday to do just that. But the tally — all Washington state Democrats backed it; all Republicans opposed it — escalated an emerging political battle over tax priorities, after years of GOP anti-tax fervor. Members of both parties overwhelmingly wish to defuse the AMT but are having a sharp dispute on how.
The bill would make up an anticipated $80 billion in lost tax revenue by requiring managers of investment partnerships, such as private equity funds, to pay ordinary income-tax rates on more of their income, rather than a lower capital-gains rate. The bill also would restrict the ability of very affluent Americans from reducing their tax rates through offshore tax shelters.
Meanwhile, a handful of tax provisions affecting individuals and businesses would be extended. These include provisions that allow for itemized deductions of state and local sales taxes, and continue a tax break for tuition expenses.
The bill also would extend the research-and-development tax credit used by businesses and a tax credit for investments in financial institutions that serve low-income communities.
When Republicans ran Congress, they passed annual AMT patches, but they didn't make up for the lost revenue: They expanded the federal deficit. They now are pledging to fight any new taxes to pay for the AMT patch, and the White House has said it would veto a tax increase.
"I feel like the little boy in Holland sticking his thumb in the dike," said Louisiana Rep. Jim McCrery, senior Republican on the Ways and Means Committee. "If I'm not here today about to stick my thumb in the dike ... we're going to have a torrent, a flood of tax increases over the next 10 years."
Democrats contended the proposal would restore fairness to the tax structure.
"How can you possibly call it a tax increase when we're trying to bring some degree of equity to the system?" asked Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee and the main author of the tax plan.
Some key Senate Democrats oppose proposed tax increases such as the ones in the House bill. And the chairman of the tax-writing Senate Finance Committee hasn't said how he would offset the revenue loss.
This wouldn't be a problem if it weren't November. The Internal Revenue Service set a Nov. 16 deadline to finalize forms and instructions for the 2008 tax-filing system. But Senate Majority Leader Harry Reid, D-Nev., said earlier this week that he won't move an AMT patch before Thanksgiving.
By missing the Friday deadline, lawmakers will mess up the timely issuance of tax refunds for millions of taxpayers. The IRS and Treasury Department estimate a patch not passed by early December could delay issuance of $75 billion in refunds to taxpayers who file 2007 tax returns before March 31, 2008.
Additionally, 12 tax forms — one for the AMT and 11 others for various tax credits — would be affected by the delay.
"I think the folks that are using the term 'train wreck' are being very precise," a Senate Republican staffer close to the tax-writing process said. The staffer, who spoke on condition of anonymity, said the Senate is backed up with votes still to come on a controversial farm bill, several spending bills and a continuing resolution to fund government operations.
Still, tax-policy veterans expect a late-hour patch.
"I would bet it's going to happen because nobody wants to go home at the end of the year and have that many people fall under the clutches of the AMT," said Roberton Williams, a tax expert at the center-left Tax Policy Center in Washington.
Copyright © 2007 The Seattle Times Company