Congress is hurtling toward adjournment after resolving a series of stand-offs between Democrats and Republicans and between Congress and the President. Republicans in the Senate twice successfully blocked attempts to pay for AMT relief, while the President twice successfully vetoed expanded health insurance for children. Meanwhile, an attempt to shift tax breaks from "dirty" energy to "clean" energy failed by one vote, although Congress did enact some important non-tax-related energy provisions.
Alternative Minimum Tax: Congress Passes "Patch" But Doesn't Pay for It
On Wednesday, the House of Representatives approved a Senate-passed bill to "patch" the Alternative Minimum Tax (AMT). The "patch" is basically a one-year measure that extends through 2007 the exemptions that keep most of us from paying the AMT, which is a sort of backstop tax that ensures the wealthy pay at least some minimum amount of income tax regardless of how many deductions and credits they claim.
The AMT was originally intended to target only the very wealthy. Over time its reach expanded because the exemptions were never indexed to inflation, and the Bush tax cuts caused the AMT to expand much more. Since the AMT is in fact an alternative tax, if regular income taxes are cut without corresponding cuts in the AMT, more people pay the AMT.
In 2001, the President chose not to include corresponding adjustments to the AMT in his tax cut plan, although he surely assumed Congress would prevent the AMT from taking back a large portion of the tax cuts for moderately well-off families. And that's exactly what Congress has done, albeit through temporary patches passed periodically rather than a permanent fix. The cost of these patches was never included in the cost estimates of the Bush tax cuts that were presented to the public when they were being debated, effectively masking the true costs of those cuts.This obviated the need for even a pretense of offsetting those additional costs. Today Congress is still not offsetting those costs.
Republicans Block Two Fiscally Responsible AMT Bills
The Republicans in the Senate were able to block two attempts to pay for the AMT patch in the last two weeks, both of them approved by Democratic majorities in the House. The first bill (H.R. 3996) would have replaced the revenue, partially by closing the loophole for "carried interest" paid to managers of buyout funds and other types of funds which allows these super-wealthy individuals to pay taxes at a lower rate than middle-income people.
Every Democrat in the Senate voted to act on this version (minus the Presidential candidates who almost certainly would have voted for it if they had been present) and every Republican who voted voted against. In the Senate, 60 votes are required to consider most legislation, so the bill could not be acted on despite the support of every member of the majority party. Senate Democrats were then forced to approve the $50 billion patch without any offsets, violating their pledge to adhere to newly reinstated pay-as-you-go (PAYGO) rules.
The House passed another version of the AMT patch with offsets (H.R. 4351), this time focusing more on cracking down on offshore tax avoidance by fund managers. The pattern repeated itself in the Senate, as the Republican minority was able to block the bill, choosing to protect wealthy tax evaders who use offshore shell companies rather than paying for AMT relief.
On Wednesday the House of Representatives voted to approve the Senate-passed AMT patch without offsets. Ways and Means Chairman Charlie Rangel said that it would be pointless to oppose AMT relief since it is very unlikely that the public would understand why a tax no one had ever heard of was suddenly affecting some families who were fairly well-off but not rich.
Media Neglects Role of GOP Obstruction
The press has focused unfairly on the "failures" of the Democrats to meet all of their goals.
This is unfair partly because the goals were extremely ambitious in retrospect. Democrats promised to provide $50 billion worth of AMT relief and also promised not to increase the deficit. This was while the Republicans in Congress and the President took an extreme stance on tax matters. Closing any tax loophole, even the most blatantly unfair tax loophole, represents a tax increase that will wreck the economy according to the President and his allies in Congress. They even equate stopping offshore tax evasion with tax increases that will discourage investment. In hindsight, it's clear that lawmakers taking this extremist position on taxes were ready to follow their President off a fiscal cliff by obstructing common sense measures.
It's also unfair to say the Democrats "caved" on PAYGO, as some media accounts have it, given that every Democrat in the Senate voted to pay for the AMT relief as did all-Democratic majorities in the House. Thanks to the 60-vote threshold to pass legislation in the Senate, the minority party was able to block the fiscally responsible legislation. Why the press has largely failed to note that Republican obstruction is the root cause of the AMT-PAYGO debacle is entirely unclear.