Congress shielded about 21 million Americans on Wednesday from having to pay higher 2007 taxes under the controversial alternative minimum tax, a levy originally aimed at the super-wealthy.
On Congress’ last working day this year, the House voted 352-64 for a one-year fix or “patch” of the alternative minimum tax (AMT), which increasingly would ensnare middle-class people because it wasn’t indexed for inflation when it was approved in 1969.
The measure now goes to President Bush, who has indicated he will sign it. Without it, some Americans who have never paid the AMT would face an average tax hike of about $2,000.
Nonetheless, because the patch was passed so late in the year, tax refunds could be delayed for several weeks next year. The Internal Revenue Service has said it would take seven weeks from passage to reprogram its systems and forms to reflect the changes.
“Our people will do everything they can to quickly update our systems for this major change,” Acting IRS Commissioner Linda Stiff said in a statement. Treasury Secretary Henry Paulson said it is “likely” that refunds could be delayed but didn’t say how long.
Although adjusting the AMT has become an annual ritual, passing this year’s patch turned into more of an ordeal. House Democrats initially insisted that its $50 billion cost would have to be offset elsewhere, chiefly through raising taxes on offshore tax shelters and on private equity firms.
But Bush threatened to veto the House’s version and the Senate declined to go along with the House approach on Tuesday. And so, with time running out for more action, Democrats caved on Wednesday. “We have little choice,” said Rep. Richard Neal (D-Mass.).
Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, accused Republicans of being fiscally irresponsible by not paying for the AMT fix. But the GOP said the levy was never intended for the middle class and shouldn’t be offset by higher taxes on other groups.
“It is not necessary to enact a tax increase in order to prevent another tax increase,” said Rep. Jim McCrery of Louisiana, the ranking Republican on the Ways and Means Committee.
On a busy wrap-up of its session, Congress completed action on other legislation, including a massive $555 billion spending bill that includes $70 billion for the Iraq and Afghanistan conflicts. This measure, approved 272-142 by the House, represents a victory for Bush. In the roll call, 194 Republicans joined with 78 Democrats to pass the bill.
It provides funding for all government departments except defense, covered under separate legislation. Democrats succeeded in adding $11 billion in extra spending in health care for veterans, firefighting, border security and relief for droughts.
Children’s program extended
On another major bill, Congress extended a popular children’s health-care program called the State Children’s Health Insurance Program through March 2009, but without extra funding sought by Democrats to cover as many as 10 million children. Bush vetoed this expansion, and Democrats couldn’t muster the votes to override his objections.
It guaranteed that the SCHIP program would be a major issue in the 2008 election. “What we couldn’t resolve, the American people will resolve in November,” said Rep. Rahm Emanuel (D-Ill.), who pushed the expansion in Congress.
This measure also provides doctors a one-half of 1 percent rate increase when treating the elderly and disabled under Medicare, nullifying a scheduled 10 percent cut. This provision will expire June 30.
White House spokeswoman Dana Perino said in a statement, “With this [SCHIP] bill, we can be assured that children will continue to have coverage, and Democrats won’t be able to play election-year politics with children’s health.”
Democrats said they had scored major achievements in this year’s session, but Bush prevailed on most of the larger issues, using the veto and the threat of a veto to get his way — just as he did in winning the political struggle over the alternative minimum tax.
But the AMT vote presaged major future battles on the levy, which essentially requires taxpayers to calculate their taxes twice. First, they must figure their income and deductions to see how much they owe under the regular income tax. Then, they must do a second calculation to determine whether they owe the AMT. Many popular deductions, including exemptions for dependents, cannot be taken under the AMT.
‘Patch’ an annual affair
The AMT contains its own exemptions that Congress manipulates to spare more Americans from paying the levy. Because these exemptions were never indexed for inflation, the annual patch has become necessary to prevent higher taxes on middle-income Americans. Many American families earning less than $100,000 annually would have been subject to the AMT without the patch adopted Wednesday. In 2006, Congress boosted these AMT exemptions to $62,550 for joint filers and $42,250 for single filers. The bill approved Wednesday increases these levels to $66,250 for joint returns and $44,350 for singles for 2007. Without the patch, the 2007 exemption would have dropped to $45,000 for joint returns and $33,750 for single returns.
The next big AMT fight will be over repeal of the levy. Members of both parties have called for its demise, but they disagree on whether the enormous loss of revenue — about $1 trillion over 10 years — should be offset with an equal amount of tax increases and spending reductions. Rangel would retain the AMT, but only for those earning more than $250,000 a year.
A tax reform commission established by Bush recommended repeal of the AMT but urged that Congress scale back the mortgage-interest tax deduction to make up for the lost revenue. Bush, however, did not adopt the commission’s recommendations.
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wneikirk@tribune.com
