Tax break tug-of-war on tap

Despite pressure to pass AMT relief, lawmakers are still weighing whether and how to pay for it and a host of other tax-break extensions, too.

By Jeanne Sahadi, senior writer

NEW YORK ( -- Lawmakers are looking to pass $71 billion worth of tax-break extenders this year. Most politicians support the extensions, but how to pay for them is another matter entirely.

As part of his sweeping tax bill introduced last week, House Ways and Means Chairman, Charles Rangel (D-NY), proposed a temporary fix for the Alternative Minimum Tax (AMT) so that it won't unintentionally hit more than 20 million taxpayers this tax season.

There are 32 other popular one-year tax-break extenders that mainly apply to businesses, but a few would affect individuals, such as deductions for tuition and for state and local sales taxes.

Both the House and the Senate are under the gun to do something about the AMT in the next two weeks. Otherwise they risk the wrath of up to 50 million taxpayers, who could see processing delays of their returns and refunds if lawmakers wait until later this year to take action.

Congress is considering a patch that would temporarily increase income exemption levels and allow for certain personal exemptions normally disallowed in computing AMT liability.

The patch is expected cost roughly $50 billion in projected federal tax revenue over 10 years. The cost of the other 32 breaks under consideration is $21 billion. That means Congress will have to come up with a total of $71 billion in revenue raisers if they observe pay-go rules, which require lawmakers to raise as much in tax revenue as they cut, or to cut spending as much as they cut taxes.

Leading Democrats, including Rangel and Senate Finance Committee Chairman Max Baucus (D-Mont.), say they support pay-go for the AMT patch.

But leading Republicans, such as Senate Finance Committee Ranking Member Charles Grassley (R-Iowa) and House Ways and Means Ranking Member Jim McCrery (R-La.), contend that since the tax was never meant to hit so many people, correcting for it should not mean replacing the lost tax revenue with other tax revenue.

What's likely to happen is a not-quite-middle-ground solution, said Anne Mathias, director of research for the Stanford Group, a policy research firm. Her prediction: Lawmakers will waive pay-go provisions to pass an AMT patch and offer to come up with enough in revenue raisers to pay for any other one-year extenders they pass.

"Initially they'll propose to pay for it all and then they'll negotiate their way down," Mathias said.

Congress will consider several options to pay for those extenders.

Mathias said it's likely the so-called "Blackstone Bill" will be an attractive revenue raiser to lawmakers. That legislation would tax partnerships as corporations if they go public, as the private equity firm Blackstone did recently. Typically, partnerships are taxed more lightly than corporations.

Others options might be drawn from the roughly $53 billion in revenue raisers already approved by the Senate Finance Committee for earlier bills, said Clint Stretch, managing principal of tax policy at Deloitte Tax LLP. Those provisions would primarily affect businesses, although two of them could affect a small number of individual taxpayers.

The first would change how executives' deferred compensation is taxed. The second would subject a portion of an S Corporation shareholder's compensation to the self-employment tax, which consists of taxes for Social Security and Medicare.

An S corporation has a very limited number of shareholders that typically must pay investment tax but are not subject to federal income tax. Consequently, shareholders' money isn't subject to the self-employment tax, which is tied to wages. The proposal under consideration would make shareholders pay self-employment tax on any money they receive for performing a service to the S corporation.

Another possible revenue raiser is a codification of the economic substance doctrine. That provision would make it harder for companies to engage in tax dodges, and it would also make it easier for the IRS to impose penalties for such violations.

One other option would affect investors directly. There's a provision that would require brokerages to report the price at which an investor bought a stock - known as the cost basis - instead of relying on investors to self-report their basis when they sell a security. The provision would prevent investors from inflating their cost basis to reduce their capital gains tax bill.

Of all the tax-break extenders lawmakers are considering, AMT relief is the only provision that actually expired in 2006 and would need to be renewed in order to be in effect by the time taxpayers file their 2007 returns. All the others are still in effect for this year and won't expire until next year, so there's less urgency to pass them.

For now, "The only must-do is AMT relief," Stretch said. But she added that the other 32 extenders "are very popular and have good politics to them." Top of page