AMT: House passes fix, Senate likely to kill

NEW YORK (CNNMoney.com) -- Unwilling to give in to the Senate, the House on Wednesday passed a revised bill calling for a one-year "fix" to the Alternative Minimum Tax (AMT) that would be fully paid for by imposing new taxes and penalties, primarily on businesses.

The move is likely to be rejected by the Senate, which last week passed its own AMT fix with no funding, a stance that Republicans and the White House have insisted on repeatedly.

The ongoing feud between Democrats and Republicans on the pay-for issue has postponed passage of the AMT patch throughout the year. That postponement threatens to delay the beginning of tax-filing season and refunds.

Lawmakers have only about 7 legislative days left in 2007 to provide temporary relief from the AMT to about 21 million mostly upper-middle-income taxpayers. The estimated cost in lost tax revenue that the AMT would provide: over $50 billion.

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 filers who otherwise would not have paid much under the regular income tax code. 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. The bill passed by the House calls for an increase in those levels to $66,250 and $44,350, respectively. Without a patch, the 2007 exemption amounts will fall to $45,000 for joint filers and $33,750 for single filers.

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 every year. And lawmakers part ways on what to do if that money isn't coming in.

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 taxpayers; and
• The offsets proposed are often 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.

The House bill passed Wednesday would fully offset the cost of the one-year AMT fix. But it does so minus a key provision from an earlier House-passed bill that the Senate objected to. That provision called 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 but not all Democrats contend that the carried interest is really a fee for managing investors' money and should be taxed like regular income.

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.

Despite Wednesday's vote, many political observers say that because the Senate overwhelmingly passed a patch without any offsets (the vote was 88-5), the House will go along at some point.

"The ultimate outcome on AMT will be a one-year patch that is passed with no offsets," said Anne Mathias, policy director of research for the Stanford Group, a policy research firm. "The House does not want to do it that way, but the reality is that the Senate cannot do it any other way. I still think that the House will ultimately be 'forced' to pass a plain AMT relief bill. They will just wait until the last moment to do so."