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VOL. 122 | NO. 237 | Thursday, December 13, 2007

Republicans, Democrats at Odds Over Paying for Middle-Class Tax Relief

By JIM ABRAMS | Associated Press Writer

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WASHINGTON (AP) - Republicans say it's OK not to cover the $50 billion in revenue losses from Congress' annual alternative minimum tax fix to save millions of families from higher taxes - even as the GOP president counts on revenues from that higher levy to reduce the red ink in his budget.

Democrats look at it as smoke-and-mirrors budgeting, the kind that has allowed the federal debt to swell to more than $9 trillion.

GOP assertions that Congress would never allow the AMT to hit more people so there's no reason to raise other taxes to make up for revenue losses "is the most disingenuous argument I've heard in my 19 years here," said Rep. John Tanner of Tennessee, a member of the House Democrats' fiscally conservative Blue Dog group.

Caught in the middle are millions of taxpayers who could see delayed refunds or a bigger tax bill because of the dispute. At stake is $50 billion in higher taxes if Congress, now in the final hours of this year's session, fails to work out its philosophical differences over the AMT.

The Internal Revenue Service has already warned that, with the AMT question still up in the air, it will likely have to delay processing returns, and giving out refunds, when the tax filing season begins next month.

The AMT, which disallows most exemptions and deductions, was initiated in 1969 to catch some 155 super-rich people who weren't paying any taxes. But unlike several other taxes, Congress opted not to index the AMT for inflation. Consequently, every year more people are subject to it. The number was 4 million in 2006 and that could grow to 25 million, many in the $75,000 to $200,000 income range, if Congress doesn't act. The average increase for each of those taxpayers would be about $2,000.

In recent years Congress has enacted one-year fixes to keep the AMT from expanding. Everyone supports another fix this year; the two parties are split over whether the $50 billion should be made up elsewhere.

House Democrats, in one of their first acts upon assuming the majority last January, passed a "pay-as-you-go" or "paygo" rule requiring that new mandatory spending programs or tax cuts be offset by an equal amount of spending cuts or tax increases so as not to add to the deficit. The AMT fix passed by the House in November contains new tax revenue, much of it raised by closing a loophole that taxes investment fund managers at a lower-than-normal income tax rate.

Senate Republicans, however, are using their filibuster powers to force the Senate into maintaining low rates for investment fund managers and accepting an unpaid-for AMT fix.

House Ways and Means Committee Chairman Charles Rangel, D-N.Y., on Tuesday came back with a new paid-for AMT bill that could be on the House floor Wednesday. He said his new plan found less controversial ways to offset the costs of the AMT relief, including closing a loophole that allows hedge fund managers to defer compensation to offshore accounts.

"In my opinion, these are all phantom funds," Sen. Judd Gregg, R-N.H., top Republican on the Budget Committee, said during Senate debate. "We basically know the alternative minimum tax is not going to generate these revenues."

Republicans, said GOP leader Mitch McConnell of Kentucky, "will not raise taxes in exchange for blocking a tax that was not meant to be."

Treasury Secretary Henry Paulson said raising taxes when the economy is shaky is a bad idea, and the White House said the president would veto any bill with a tax increase.

The problem is that the administration must adhere to current law in drawing up it long-term budgets. That means a steady growth of AMT revenues that will contribute to its goal of balancing the budget by 2012. The White House did include an AMT fix in this year's budget proposal, but assumes more than $500 billion in AMT revenues through 2012.

"That money is built into the budget as part of the expected revenue stream," said Boston University law professor Alan Feld.

"When people say, 'Well, nobody ever anticipated this revenue,' that is not the case," said Senate Budget Committee Chairman Kent Conrad, D-N.D. "Everybody who wrote a budget around here anticipated it. Every single budget, including the president's, including every budget written by Republicans or Democrats, included this revenue."

If the AMT is repealed without offsets, "there is no way that the president's budget gets to balance in 2012 or in the foreseeable future," said Thomas Kahn, staff director of the House Budget Committee.

The liberal-leaning Center on Budget and Policy Priorities said in a recent report that the then GOP-led Congress knowingly used the AMT in writing the massive tax cuts of 2001. Reduced liabilities from the tax cuts made more people subject to the AMT, meaning more revenue for the government - at least on the books.

"This assumption made the bill look much cheaper, allowing many more tax cuts to be squeezed in," the center's report said.

Congress enacted "paygo" into law during the first President Bush's administration. But that law, which fostered the balanced budgets during the late Clinton years, was allowed to lapse in 2002, when Republicans were working on the Bush tax cuts.

The new paygo principle imposed by House Democrats last January is only a House rule, not a law.

But the Blue Dog Democrats, so far with the backing of the House Democratic leadership, say they are not about to bend that rule for the AMT. "If you start picking and choosing," said Rep. Allen Boyd, D-Fla., "you might has well throw the whole thing out the window."

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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