AMT: The fight for a fix

NEW YORK (CNNMoney.com) -- By the end of next week 21 million taxpayers will probably receive the protection they've been promised from the Alternative Minimum Tax (AMT). But the fix likely won't account for an estimated $50 billion in lost tax revenue.

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.

And ultimately, say Washington analysts, the House will have to give in.

"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."

Clint Stretch, managing principal of tax policy at Deloitte Tax LLP, agrees. "[The Senate] most likely will send the House the clean (un-offset) bill as a last minute take-it-or-leave-it proposition. The betting is the House takes it."

For now, though, the House Democrats are not yielding. "With passage of this bill, we're giving the Senate Republicans another opportunity to be responsible and hopefully this time they will do the right thing and support this critical relief," said House Ways and Means Chairman Charles Rangel, D-N.Y., in a statement.

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

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.

"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.

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.