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House Democrats Spy a Winner on AMT Fix

Despite months of delays, House Democrats still hope they can push through a tax overhaul that would shift a major chunk of the tax burden to the rich while providing a broad tax cut for the middle class.

They have crafted, shopped and poll-tested a bill that would permanently “fix” the alternative minimum tax. But the plan is far more ambitious than a simple AMT bill. It also would increase personal exemptions and tax credits in a broad-based redistribution of the tax burden.

The bill has many moving parts, but the concept is relatively simple: About 90 million families would get a tax cut, paid for by a hefty 4 percent rate hike on the few million who make more than $500,000 a year. It has been delayed for months as Democratic leaders worked to build support in their Caucus while sparring with the Senate, which is inclined to adopt a far less ambitious, short-term AMT fix. A House Democratic leadership aide said Monday that Senate resistance could sink the package this year.

But Democratic leaders believe the public will overwhelmingly support the bill when they understand it.

“This is simple tax fairness,” said Democratic Congressional Campaign Committee Chairman Chris Van Hollen (Md.). “The Bush approach to taxes was to implement a policy that benefited a very few at the very top.”

Even the highest earners would still be paying a lower tax rate than they did before 2001, Van Hollen noted.

Rep. Richard Neal (D-Mass.), chairman of the Ways and Means Subcommittee on Select Revenue Measures, said he, Democratic Caucus Chairman Rahm Emanuel (Ill.) and others have had numerous meetings with small groups of Democrats across the political spectrum in the past several months to shop the plan and have not run across any significant opposition. Polling and focus groups have shown that the plan would win public support, Neal said.

Members of the fiscally conservative Blue Dog Coalition endorsed a long-term fix to the AMT instead of a short-term patch in a July 11 letter to Neal, although they didn’t specifically endorse the idea of taxing the rich to pay for it.

Democrats say the bill will put many Republicans in a tight spot because they will be attacked for voting against tax breaks for the middle class if they oppose it.

“The Republicans are counting on Americans not paying attention to what’s happening,” Van Hollen said.

But not everybody thinks the idea is a political winner.

Rep. Jim Cooper (D-Tenn.), a prominent Blue Dog on fiscal issues, fears Republicans will be able to use any tax hikes against Democrats.

“They are going to blast us for having the biggest tax increase in American history in order to pay for a tax cut,” he said. And few of the 23 million taxpayers who would otherwise be hit by the AMT this year realize it, Cooper said.

“I haven’t had one constituent ask me about this,” Cooper said. “We know this is a big problem but they don’t. Who is going to send us a thank-you letter?”

Cooper said Democrats would do better to cut the payroll tax, which voters would see immediately in their paychecks.

Van Hollen acknowledged that Democrats have to reach out to voters to explain the looming threat of the AMT. “A very important component of this is a strong education campaign,” he said. “People need to understand that Republicans left this tax guillotine waiting to come down on the heads of millions of middle-class taxpayers.”

Republican leaders say they are looking forward to a good-old-fashioned tax fight and question whether the Democrats can hold together on an issue that historically has worked to the GOP’s advantage. A House GOP leadership aide said the delay in bringing forward the AMT bill showed a lack of confidence that they could sell the plan to the public.

“If they had a real winner politically they would have done something with it by now,” the aide said.

In addition to the AMT bill, Democrats also are proposing to pay for a massive expansion of the State Children’s Health Insurance Program with a 61-cents-a-pack tobacco tax hike, which has sparked some opposition in Democratic ranks.

“All the tax hikes are good for us,” said House Minority Whip Roy Blunt (R-Mo.).

“They are talking about tax hikes with AMT, they are talking about tax hikes with SCHIP,” said Ryan Loskarn, spokesman for the Senate Republican Conference. “You are going to see Republicans push back on that this week.”

Loskarn said Republican leaders from both chambers plan to hold an anti-tax event that also will highlight their opposition to Democratic spending bills.

Ways and Means ranking member Jim McCrery (R-La.) predicted most Republicans would not support an AMT repeal as long as it includes a massive tax increase. McCrery said Democrats don’t have credibility when it comes to taxes and said Republicans could safely vote against the bill because most voters wouldn’t realize that they are being saved from the AMT.

Rep. Ray LaHood (R-Ill.) backs the tobacco tax hike but said he’s uncertain whether he would support an AMT overhaul that boosted tax rates on the rich. “The AMT is an onerous tax, it’s one we’re all worried about,” he said. “But a lot of our people are very leery about increasing rates. We think it’s done wonders for the economy and we don’t want to screw that up.”

The package still could change before it comes to the House floor this fall, with another full committee hearing expected next week on fairness in the tax code.

Meanwhile, it’s uncertain if the Senate can craft anything beyond a short-term AMT patch. Senate Finance Chairman Max Baucus (D-Mont.) proposed legislation repealing the AMT with ranking member Chuck Grassley (R-Iowa) but declined to say how he would pay for it. He also has said that a short-term patch is the most likely outcome this year to give lawmakers more time to figure out a longer-term solution.

Grassley has gone to the floor repeatedly to argue that any AMT relief should not be accompanied by offsetting tax hikes because the AMT was never intended to affect the millions who now fall into its snare. But if Democrats are to adhere to their new pay-as-you-go budget rules, they have to find offsetting pain to pay for the tax relief.

President Bush proposed a short-term fix to the AMT without offsets in his budget. His budget assumes a “revenue-neutral” long-term fix to the AMT that would include offsetting revenue hikes, but he has never offered a specific plan to do so. And Bush lately has stepped up his attacks against Democrats on taxes and spending, launching new salvos last week in advance of a fall veto showdown on appropriations bills as well as the bipartisan tobacco tax proposal.

Rep. Bobby Scott (D-Va.), a member of the Ways and Means Committee, said he’s concerned about the AMT bill coming up alongside the tobacco tax hike.

“It seems unseemly to me that you would increase a tax that is clearly regressive in the same budget year you are giving a tax cut — the AMT fix — that only impacts the upper income brackets,” Scott said.

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