AMT: The $50 billion fight

NEW YORK (CNNMoney.com) -- The debate over the Alternative Minimum Tax isn't nearly as gripping as an episode of "24," but like Jack Bauer, Congress is under the gun.

At stake: $50 billion and millions of delayed refunds.

Lawmakers have only about 10 legislative days left in 2007 to provide temporary relief from the AMT to about 19 million mostly upper-middle-income taxpayers.

Everyone agrees that in its current form the AMT is ill-conceived. Since the AMT's inception nearly 40 years ago, the amount of income you're allowed to exempt from AMT consideration has never been adjusted for inflation.

It was meant to catch wealthy tax evaders, but because average income has outpaced inflation over time, more and more people start to look like the rich guys when doing their AMT calculations.

Since 2001, Congress has temporarily increased income exemption levels. The last "patch" - for 2006 - put the exemption levels at $62,550 for joint filers and $42,250 for single filers. Without a patch, the 2007 exemption amounts will fall to $45,000 for joint filers and $33,750 for single filers.

So Democrats and Republicans both make impassioned speeches about the need to adjust those income exemption levels and allow for a number of tax breaks that are disallowed under the AMT.

But the AMT raises a lot of tax revenue - roughly $50 billion for 2007 alone. And lawmakers part ways on what to do if that money isn't coming in.

On Thursday, the Senate voted to provide one year of AMT relief for 2007 with no compensating new taxes.

In November, the House passed a bill that would offset the cost of a patch by raising taxes elsewhere.

"I'm disappointed the votes weren't there to pay for this bill, but I'm not sorry for choosing to protect taxpayers from the AMT even at some cost," said Senate Finance Committee Chairman Max Baucus (D-Montana) in a statement on Thursday night.

Republicans have said they oppose raising other taxes to pay for temporary AMT relief for two reasons:

• The revenue was never intended to be raised in the first place since the tax wasn't intended to hit middle class people; and
• The offsets proposed are permanent in nature, while AMT relief is temporary, at least when done on a year-by-year basis. People on both sides of the aisle, however, have called for permanent repeal of the tax as well.

Democrats and deficit watchdogs on both sides of the aisle contend that AMT relief should be paid for because the cost of borrowing the money raises the long-term cost of the patch and increases the country's deficit.

Federal budget estimates are based on assumptions that there would be no AMT relief and that the $50 billion from 2007 tax returns would be flowing into government coffers.

"If the nation doesn't pay for extending AMT relief now, it will have to later, through tax increases, spending cuts, or both, that are likely to affect millions of ordinary working families," accordiing to a statement from the liberal Center on Budget and Policy Priorities.

Next week, House Ways and Means Chairman Charles Rangel (D-NY) is likely to put forth another AMT patch bill that will have fewer offsets than the one the House passed last month.

The biggest concession he's expected to make: he will eliminate the provision that calls for investment fund managers to pay income taxes on the portion of their compensation known as "carried interest." Carried interest is the managers' share of a fund's profits and is currently taxed as a capital gain at 15 percent.

Most Democrats contend that the carried interest is really a fee for service to compensate the manager for managing investors' money. Private equity and hedge fund managers - and several lawmakers from states where they work, such as Sen. Charles Schumer (D-NY) - have opposed such a tax increase.

Rangel is still, however, expected to propose a tax increase on offshore funds. But Tax Vox, a blog by various writers at the Tax Policy Center, reported that "some senior House Democratic leaders are hinting that they will give up the fight for any offsets."

That wouldn't surprise Anne Mathias, political director of research for the Stanford Group, a policy research firm.

While she expects a lot of debate about the patch bill in the House next week, she doesn't think a bill with offsets will get very far, given that the Senate passed a patch without offsets by an overwhelming majority (88-5) and given that there are just two legislative weeks left to go.

Her prediction: "Ultimately, the House will cave and pass the AMT without offsets because there's no way the Senate can pass something with offsets and no way the Democrats will let the year end without a patch."