The House voted Wednesday to protect more than 20 million mostly upper-income taxpayers in danger of being slapped with a tax increase averaging $2,300 because of the alternative minimum tax.
To help offset the cost, the bill (H.R. 6275) more than doubles the 15 percent tax rate that many private equity and hedge fund managers pay on their profits. It passed 233-189 on a mostly party-line vote.
The offset was strongly opposed by Republicans, and it faces resistance in the Senate, assuring that Congress still faces a struggle as it tries to stave off the effects of the AMT for another year.
House Democrats, insisting that fixing the AMT must not add to the federal deficit, inserted about $61.5 billion in new revenues, much coming from making hedge fund managers and oil and gas companies pay more.
"If indeed we do nothing, $61 billion of tax burden is going to fall on 25 million good American taxpayers. And we want to fill that gap of the $61 billion. The other side says it doesn't exist," House Ways and Means Committee Chairman Charles Rangel, D-N.Y. said.
But the top Republican on that committee, Jim McCrery of Louisiana, said the legislation pointed out a clear difference between the two parties. "Republicans believe that Congress should not raise taxes on one group of taxpayers in order to prevent an increase on another set of taxpayers," he said.
Without congressional action, the number of taxpayers swept up by the AMT could balloon from around 4 million to between 25 million to 30 million. The Bush administration estimates that 22 million would be newly exposed to the tax without a legislative patch. Citizens for Tax Justice says the average tax relief would be about $2,300, with about two-thirds going to taxpayers with incomes of $127,000 or more.
In the 2006 tax year, a few taxpayers with incomes as low as $40,000 were affected by the alternative minimum tax, according to figures kept by the congressional Joint Committee on Taxation. About 10 percent in the $100,000 to $200,000 income bracket were affected by the tax, and 74 percent in the $200,000 to $500,000 income range had to pay it.
The AMT was enacted in 1969 to catch a small number of very rich tax dodgers, but the tax now hits many more people because it was never adjusted for inflation. This has led to an annual scramble by Congress to provide one-year fixes.
Last year the battle over whether the AMT relief should be paid for with new revenue sources continued to the last day of the congressional session in December, when the House finally abandoned its position and passed an AMT without offsets.
This year too, Senate Republicans have strongly opposed the extension of existing tax breaks if accompanied by increased tax revenues elsewhere, and Senate Finance Committee Chairman Max Baucus, D-Mont., has indicated that it may be inevitable to accept an unpaid-for AMT fix.
The offsets in the package before the House Wednesday include a measure that would raise $31 billion over 10 years by increasing the tax rate on the share of investment profits received by private equity and hedge fund managers, also known as carried interest. Managers of private equity and hedge funds are now generally taxed at the 15 percent capital gains rates on the profits they share instead of the 35 percent individual income tax rate that would normally apply to high-income individuals. The bill would tax most of their profit-sharing income at the higher 35 percent rate.
The bill would also disallow certain deductions oil and natural gas companies receive for domestic production, bringing in $13.6 billion.
A third provision requires credit card companies to inform the IRS of payments they make to merchants for credit and debit card transactions. This would allow the IRS to better track business income, raising some $9.8 billion. Finally,the bill closes a loophole used by foreign multinationals to avoid taxes on income earned in the United States, raising almost $7 billion.
The White House threatened a presidential veto of the AMT fix if it is accompanied by the new revenue provisions. "The administration urges Congress to reduce the risk of disruption to the 2009 tax filing season by eliminating tax increases from the bill," it said in a statement.
The fight over offsets last year forced the IRS to delay sending out refunds to millions of taxpayers because it had to adjust its computer programs to comply with the late changes in the AMT law.