Tax Gambit in Senate Version of Rescue Plan

Sweetener or poison pill?

By Kaye A. Thomas
Posted October 2, 2008

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Objections from the House of Representatives.

While all eyes have been on the economic rescue plan, we've been closely watching tax legislation designed to keep some popular tax benefits from expiring and prevent a huge increase in the number of taxpayers hit by the alternative minimum tax (AMT). Up to now we've seen a repeat of the ping-pong game played last year, when the House of Representatives did one thing, the Senate did something different, the House said no, our way is better, and the Senate said too bad, take our version or forget about it. Now the Senate has stuck its version of the tax legislation into the economic rescue plan, a gambit that may win some votes in the House but could also lose some.

Paying for the patch

The core issue has to do with the AMT. Congress has never indexed this tax for inflation, so it would apply to an ever-expanding number of taxpayers each year without an annual fix known as the AMT patch. Despite the name, this is not some minor band-aid: this year's AMT patch will have a budget impact of over $60 billion. Going along for the ride are a number of other "extenders" that prevent the expiration of some popular tax benefits, such as deductions for state a local sales tax and qualified tuition.

Fiscally conservative "Blue Dog" Democrats insist the AMT patch should be accompanied by offsets to prevent an increase in the deficit — in other words, tax increases. These increases are mainly aimed at ultra-high-income individuals such as hedge fund managers who use certain techniques to avoid paying tax on their compensation income. Republicans oppose these offsets, arguing that a permanent tax increase should not be used to offset a temporary tax benefit (a one-year AMT patch).

Democrats in the House can muster a majority for AMT patch legislation that includes the offsets, but the Senate's filibuster rule makes it possible for Republicans to block this measure. Bowing to this reality, Senate Democrats have reached a compromise that allows the AMT patch to go through without a full offset. That's when the ping-pong game begins, with the Senate sending its version to the House and the House sending its version back to the Senate. Last year, the House finally gave in, but not until so late in the year that the IRS had to reprint some of its forms and some taxpayers who would have liked to file early in the season faced delays.

Congress has been going through the same dance again this year, but it wasn't clear we were heading for the same outcome. Both sides were holding firm as Congress prepared to adjourn for the election. Unless the leaders decide to hold a lame duck session after the election, the issue could remain unresolved until the next Congress begins work in January, playing havoc with the 2009 tax filing season.

Economic rescue package

Now the Senate has tacked its version of the AMT patch onto the economic stabilization law. The hope is that this maneuver will gain support from House Republicans (always loath to vote against a tax cut) and secure passage of the overall package. It has the added advantage of potentially avoiding major problems in the coming tax season. The move could lose some votes among Democrats in the House, though, and it remains to be seen whether it will gain more votes than it loses.

Comment: It now appears that the health of the nation's economy for years to come may turn on how much importance House members attach to enacting a particular version of the AMT patch. That's way too much irony.

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