Congress acted in its final hours Wednesday to block growth of the alternative minimum tax, putting off an economic hardship affecting more than 20 million taxpayers and avoiding what would have been a political black mark for both parties.
The House voted 352-64 for a one-year fix of the AMT, a four-decade tax originally meant only to touch super-rich tax dodgers but now hitting millions of middle- and upper-middle income level households. Without that fix, an annual ritual of Congress, those subject to the tax would have risen from 4 million in 2006 to about 25 million in 2007, with the average levy of $2,000 a taxpayer.
"What we are hearing across the country today is a collective sigh of relief," said Rep. Eric Cantor, R-Va.
The legislation now goes to President Bush, who says he will sign it because, bowing to White House and GOP demands, it does not include tax increases or other new sources of revenue to pay for the $50 billion cost of the tax relief.
The last-minute nature of the vote on the AMT fix resulted from a fundamental difference between the House and Senate. House Democrats had insisted that the $50 billion in tax relief resulting from the one-year fix must be paid for by an equivalent amount of revenue elsewhere, mainly by closing a loophole on offshore tax havens.
Senate Republicans, however, blocked the Senate from taking up legislation that includes a tax increase, and Bush threatened to veto any bill that raised taxes.
On Tuesday night the Senate for a second time rejected the House-backed approach of a paid-for AMT bill. The House Democratic leadership, which was committed to paying for the tax relief, had asked the Senate to make one last stab at the issue. The Senate vote was 48-46 for the House bill, 12 short of the 60 needed to approve it.
With that vote, the House had no choice but to take up the Senate bill, which shields some 21 million taxpayers without a means to cover the cost to the Treasury.
"Let me be clear: There is no disagreement between Republicans and Democrats over protecting the middle class from the AMT," House Majority Leader Steny Hoyer, D-Md., said. "The question is, will we do so responsibly or charge tens of billions of dollars to our grandchildren?"
Cantor, the Republicans' chief deputy whip, said the Wednesday vote was "a huge victory for us." The GOP position, he said, "has been consistent down the line. We don't believe we ought to raise taxes to correct the mistake of AMT."
The AMT was created in 1969 to make sure that a small group of very rich people did not totally avoid paying taxes. But the tax, which applies more stringent rules for using deductions in calculating tax obligations, was never adjusted for inflation, and every year more middle- and upper-middle-level income people are hit by it. The main beneficiaries of the tax relief would be people in the $75,000 to $200,000 income level.
Even with House passage of an unpaid-for bill, the consequences of the congressional dispute could be felt by millions.
The Internal Revenue Service has said that it will take seven weeks from the time the bill is signed into law to reprogram and test forms, going well past the planned mid-January start of the 2008 filing season.
The IRS said Tuesday that it has yet to decide whether certain delays in processing returns and sending out refunds will affect AMT taxpayers or all taxpayers.
Chrys Sullivan, assistant vice president for client service at H&R Block, cited IRS figures indicating that by Feb. 9, 2007, the IRS had already issued some $68 billion in refunds. She said Block is telling taxpayers to prepare their returns so they will be ready to file as soon as the IRS begins accepting returns. She said consumers should also be aware of scams — those who claim they can get refunds faster despite IRS delays.
Republicans were unanimous in supporting the unpaid-for AMT bill, while many Democrats, led by the fiscally conservative "Blue Dogs," said the House should not bend on its "pay-as-you-go" principle that requires all tax cuts or mandatory spending increases be offset by the same amount of tax increases or spending cuts to keep the federal deficit from rising.
The overwhelming majority of the 47-member Blue Dogs would vote against any bill that is not paid for, said Rep. Mike Ross, D-Ark., a leader of the group. "For the life of me, I don't understand why the Republicans in the Senate continue to choose tax cheats," those avoiding taxes through offshore tax havens, "when they ought to be standing with 21 million families."
At the White House, Bush signed a bill to exempt relatives and victims of the April 16 shootings at Virginia Tech from paying federal income taxes on any payments from the Hokie Spirit Memorial Fund.
Bush said the measure would "help the folks who suffered mightily on that day when the gunman killed their loved ones. It's a good piece of legislation."