President's Veto Threat: Alternative Minimum Tax

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At the end of last year, Republicans in the Senate blocked attempts by Democrats to close tax loopholes and reduce offshore tax avoidance to pay for relief from the Alternative Minimum Tax. The White House had sent signals that the President would veto the Democratic bill if passed. Some Democrats in Congress are adamant that the debacle not be repeated, while some Republicans seem equally committed to increasing the federal budget deficit.

The alternative minimum tax (AMT) was originally created in the late 1960s to ensure that super-wealthy Americans pay at least some federal income taxes no matter how skillful they are at using tax loopholes. In recent years, its reach has expanded because Congress has not permanently indexed for inflation the exemptions that keep most of us from paying the AMT and, even more importantly, because the Bush tax cuts reduced ordinary income taxes without permanently changing the AMT. As more families see their ordinary income tax liability fall below their liability under the AMT, that means the AMT becomes relevant to the lives of more and more taxpayers.

Instead of permanently indexing the exemptions for inflation, Congress has been enacting "patches" to the AMT each year, measures that temporarily increase the exemptions to keep the AMT under control. A permanent fix was not included in the tax cut bills enacted when Republicans controlled Congress because that would have added to the official costs of those bills. Since the Democrats took control of Congress, they've attempted to reconcile AMT reform with their goal of avoiding any legislation that increases the federal budget deficit. Last year, Democrats in the House passed a one-year patch that would have been paid for by closing the loophole for carried interest paid to private equity fund managers and by cracking down on their use of offshore tax shelters. The administration called these provisions "tax increases" as did the Republicans in the Senate, who voted en masse to block the bill. Democratic leaders were then forced to pass an AMT patch that was not paid for, increasing the deficit by $50 billion.

This year there has been some discussion of using special budget procedures to make it easier to pass a bill that pays for AMT relief. If the budget resolution passed by Congress provides "reconciliation" instructions to change taxes or mandatory spending, a bill can be introduced later to accomplish that goal and can pass the Senate with just a bare majority of votes rather than the usual 60. House Majority Leader Steny Hoyer (D-MD) told BNA recently that he would support using the reconciliation process for an AMT patch, but some Democrats in the Senate think that might make it more difficult to pass a budget this year.

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