Congressional Tax Blundering

Posted: Nov 22, 2007 12:01 AM
Congressional Tax Blundering

WASHINGTON -- Habitual congressional gridlock usually has no impact on the lives of ordinary Americans. But what happened on the Senate floor last Friday just before lawmakers recessed for their Thanksgiving break will delay tax refunds next year for some 50 million taxpayers who count on them.

The underlying reason is a 38-year-old congressional tax blunder that never has been corrected. In 1969, Congress passed the alternative minimum tax (AMT) to collect from 155 tax-avoiding millionaires. But because the scheme was not indexed for inflation, this year alone it would hit 23 million extra people with taxes higher than intended. AMT will be "patched" to provide relief as it is in every Congress, but not in time this year. Refunds totaling over $75 billion will arrive many weeks late not only for taxpayers in the $100,000-to-$200,000 bracket who are unintentionally affected by AMT, but also lower-income persons because the IRS refund procedure will be disrupted by the delay.

Senate Majority Leader Harry Reid's eleventh hour effort Friday collapsed when he refused to open the proceedings to votes on Republican tax-cutting proposals. At the heart of this deadlock is a debate between Democrats and Republicans over whether the level of federal taxation should be controlled. For once, the debate comes home to ordinary taxpayers in delayed refund checks.

The AMT problem did not take Congress by surprise. The administration for months had been calling for another AMT "patch" to keep the monster that Congress built from devouring more taxpayers. But Democratic Rep. Charles Rangel, chairman of the tax-writing House Ways and Means Committee, said he instead would attempt "the mother of all tax reforms": total repeal of AMT, with lost revenue paid for by massive taxing of the rich -- a trillion-dollar redistribution of wealth over the next decade.

Rangel's "mother" was going nowhere, so Congress last month belatedly turned to passing a patch. The Blue Dogs, self-styled Democratic fiscal conservatives, insisted on offsets -- $26 billion in tax increases -- to cover lost AMT revenue. Rangel's new bill (called "little mother" by Republicans) hit unpopular targets: private equity accounts, hedge funds and investment partnerships. It passed the House Nov. 9 on a party-line vote.

Everybody knew "little mother" was pure posturing. There was no chance for the necessary 60-vote super Senate majority. Indeed, Senate Democratic leaders did not want a tax increase offset for the patch. The bill's final version that would reach President Bush's desk would contain no tax increase. Majority Leader Reid said he would not pass a bill until December when Congress returned from its Thanksgiving break.

But the Internal Revenue Service announced it would take 10 weeks to readjust its computers to account for the patched AMT, affecting its entire refund system. One $90,000-a-year Senate staffer complained he would not be getting his tax refunds, and the word spread among his colleagues (who comprise an unregistered, potent lobbyist bloc). Republican lawmakers pounded on the Democrats for inflicting pain on ordinary taxpayers. Prominent Democratic senators urged Reid to get something done.

Consequently, with senators prepared to leave Washington the next day, Reid made a surprise announcement last Thursday. The Senate would take up the AMT patch Friday morning instead of waiting for December. All signs indicated that Reid was serious about taking action.

Grave philosophical differences between Republicans and Democrats prevented passage. Senate Minority Leader Mitch McConnell proposed permitting Republicans to offer four floor amendments to the bill. Reid did not want to subject his Democrats to voting against tax cuts, including repeal of the estate tax. So the two party leaders mutually refused to grant the unanimous consent needed for the Senate to take up the bill, and the senators left Washington with another piece of work undone.

AMT surely will be patched in December, too late for timely tax refunds. The Republican political reaction was previewed by a Senate Republican Communications Center press release last week titled: "Democrat Delays Put Millions of Middle Class Taxpayers at Risk." But one senior Bush administration official privately expressed fear that Republicans would get blamed. In last Friday's brief Senate debate, Reid said "this man, this man President Bush" caused the trouble by using "credit cards" instead of offsetting tax cuts. He did not reconcile that with his own willingness to fix AMT temporarily without raising other taxes.