Senate Fails to Pass Alternative Minimum Tax

The Senate failed again Thursday to find a way to rein in a tax one senator described as a Frankenstein-like monster about to clobber millions of taxpayers.

Senate Republicans stopped the chamber from moving to a House-passed bill that would create a one-year fix on the alternative minimum tax, objecting to Democratic plans to raise taxes in other areas to make up for the lost revenue.

The vote was 46-48, 14 short of the 60 votes needed to began debate on the bill the House passed last month. Every voting Republican opposed proceeding.

"Republicans will not raise taxes in exchange for blocking a tax that was never meant to be," said Senate Minority Leader Mitch McConnell, R-Ky. "No deal. No tax cut."

Without a deal, the IRS, unsure of the final status of the tax, says it may have to postpone the processing of returns scheduled to begin in mid-January. That could mean a delay for millions of people waiting for income tax refunds worth billions of dollars.

Democrats in turn blamed Republicans for blocking legislation that, if not enacted, could subject some 25 million people to the AMT in 2007, up from 4 million in 2006. The Treasury Department has estimated that the AMT levy would cost the average taxpayer an extra $2,000.

"They find it offensive to have to pay for these tax cuts," Senate Majority Leader Harry Reid, D-Nev., said of Republicans. "This is a $50 billion patch. Shouldn't it be paid for? The answer is obviously yes."

Reid later offered to send an unpaid-for AMT bill back to the House, which has been insistent in opposing bills that add to the national debt. While Republicans considered whether to accept that offer, House Ways and Means Committee Chairman Charles Rangel, D-N.Y., made a new proposal to come up with billions of dollars by closing a loophole in offshore funds that have escaped taxation.

Rangel said that could replace increased taxes on investors and hedge fund managers, opposed by many Republicans, that is part of the House AMT bill.

The AMT was created in 1969 to prevent a very small number of extremely wealthy people from avoiding all taxes. But since it was never indexed for inflation, it affects more middle income taxpayers every year.

Senate Finance Committee Chairman Max Baucus, D-Mont., likened the AMT to Frankenstein, saying that "unless we act it will destroy the entire tax system."

Congress has reacted by passing annual fixes to prevent the number of people subjected to the AMT from growing.

This year however, the first with Congress under Democratic control, that fix has been blocked by a fundamental difference between the two parties over whether to find ways to pay for revenues lost from the anticipated expansion of the AMT.

House Democrats, committed to offsetting any lost revenues, passed a bill that included $80 billion in new tax revenues, $50 billion for the one-year AMT patch and another $30 billion to extend several dozen tax credits about to expire.

Senate Republicans, with filibuster power, have made clear they will never agree to pay for the AMT fix with new taxes, and Baucus has proposed a compromise under which there would be no offset for the AMT but there would be new taxes to fund a two-year extension of the tax credits, which include breaks for teachers, those with education costs and research companies.

The Finance Committee's top Republican, Charles Grassley of Iowa, has worked with Baucus on the compromise, but said Wednesday he could not support the $45 billion in offsets for the credits. "I am concerned that if we send this package to the House, they will try to use the offsets to pay for AMT relief," he said. "I have been around long enough not to make it too easy to stab me in the back."

House Democratic leaders have said they are not interested in bending on their "pay-as-you-go" policy. "I will not vote for an AMT if it is not paid for," House Majority Leader Steny Hoyer, D-Md., said Wednesday. "You put that in the bank."

The "Blue Dogs," a coalition of 47 fiscally conservative House Democrats, issued a statement Tuesday urging Democrats to hold their ground. "We made a commitment to the American people to reinstitute PayGo budget rules and restore fiscal responsibility to government, and we will stand by that commitment."

Senate Republicans offered a formula for bringing the AMT issue to the floor, which included votes on amendments to eliminate the AMT entirely -- which Reid said would cost $1 trillion over coming years -- replace the tax system with a version of the flat tax and make permanent 2001 and 2003 tax cuts on capital gains and dividends. Democrats rejected that.