The AMT Proves To Be A Taxing Time For Democrats

The Blue Dog Democrats

In 1969 the alternative minimum tax (or AMT) passed into law to prevent a very small group of high income earners (at the time) from avoiding paying income tax altogether. The problem (other than the passage of the bill in the first place) is that the AMT was not indexed for inflation therefore over the years more and more middle income and high middle income citizens are being folded into paying this tax, with some 20 percent of taxpayers in-line to get hit with this year!

In response, Congress has been approving yearly "patches" to the AMT but House Democrats ran into a problem this year in the form of the Blue Dog Democrat voting bloc.

Key House Bloc Opens Door to Alternative Minimum Tax Approval

A key House bloc of fiscally conservative Democrats — who are angered over the handling of legislation to fix the alternative minimum tax — on Wednesday backed off its threat to hold Congress hostage over the winter break, giving a major boost to the likelihood of the bill passing by year's end.

The House was scheduled to vote Wednesday on the patch, which is aimed at keeping the tax from affecting another 20 million more Americans. The version the House will vote on passed the Senate Tuesday night, and does not increase taxes elsewhere to pay for the lost revenue, expected to be about $50 billion. If passed, the bill would go to the president's desk.

The tax initially was aimed at the richest Americans but was not pegged for inflation, so it has steadily included more and more taxpayers. Without a permanent change to the law, Congress must act every year to stem the AMT's creep into more tax filings.

The Blue Dog Democrats — 47 House members who stand on a fiscally conservative platform —favored a fix, but they wanted it to be paid for. The Blue Dogs advocate pay-as-you-go spending that requires any increases in spending to be paid for with increases in revenue.

To get what they wanted, the Blue Dogs had threatened to vote in opposition of the version of the patch that the Senate passed, as well as possibly garner enough votes to prevent the House from adjourning for its holiday recess.


But Wednesday, Blue Dog Rep. Mike Ross, D-Ark. — who has been leading the charge on the AMT issue — said that in the end, they he believes that fighting the bill and keeping the House in session through the holidays would punish no one except staff.

"The whole situation is very frustrating to us," Ross said, refraining from criticizing House Democratic leaders.

"They hung tough I think. They hung with the Blue Dogs to the very end. They had to go for paying for it (the AMT) or not covering 20 million people. Our regret as Blue Dogs is that we couldn't give them both," Ross said.

Senate Republicans blocked the Senate from taking up legislation that includes a tax increase, and Bush threatened to veto any bill that raised taxes.

The Senate vote was 48-46 for the House bill, 12 short of the 60 needed to approve it. In so doing the House had no choice but to take up the Senate bill, which shields some 21 million taxpayers without a means to cover the cost to the Treasury.

Now, the best approach in my opinion, would be to combine AMT repeal and extension of the Bush tax cuts with a mass repeal of tax exemptions... but with this congress that may be a tall order.

In Michael Barone's piece yesterday entitled A Taxing Time For Democrats of which I borrowed for my title (thanks Michael) outlines the predicament Democrats are finding themselves in:

The paradox is that the same Democrats who want to increase top-bracket income and capital-gains tax rates are desperately eager to spare relatively high earners from the AMT. So desperate that Senate Democrats agreed to waive the "paygo" rule they reinstated when they took control. Paygo requires that a tax cut be offset by a tax increase or a spending cut of corresponding dollar amounts. But when the Senate early this month passed its $50 billion AMT "patch" exempting 23 million taxpayers from the AMT for one year, it waived the paygo rule. House Democrats are simmering, but they will probably have to go along. There's a process argument for waiving paygo, which is that future AMT revenues are fictitious because no Congress will allow the tax to go into effect. But it's nonetheless embarrassing for Democrats to renounce a rule they adopted as a guarantee of their fiscal responsibility.

The reason Democrats risked this embarrassment is that the AMT tends to fall on voters in places with high state and local government spending and taxes, Democratic places like Massachusetts, Connecticut, New York, New Jersey, Maryland, and California. Taxpayers hit by the AMT can't deduct state and local taxes from their federal income tax bill. Sooner or later, that puts downward political pressure on state and local spending. And that, in turn, threatens the vested interest of a key Democratic constituency, the public employee unions. Democratic voters in suburban New Jersey, for example, who feel far from rich face a substantial tax increase if they're suddenly covered by the AMT. They may take their revenge on Democratic candidates and on New Jersey public employee union members.

In the end it appears as though Taxes may play a much bigger role in the 2008 general election than many were prepared to admit. With a declining budget and the very real possibility of recession, the Democrats platform of raising taxes my not only be disastrous to our economy (a recession in never a good time for raising taxes) but my also keep them from obtaining the White House in 2009.

Mr. Barone says it best -- "A tax increase in a recession is usually not a good idea. And Republicans will say that when Democrats promise to tax the rich, they end up raising taxes on the ordinary person, as Bill Clinton and the Democratic Congress did in 1993. The Democrats' desperation to patch the AMT and their willingness to break their own paygo rule suggest that they fear the wrath of those New Jersey suburbanites more than they let on."


Cross posted from The Minority Report