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GOP Will Consent to AMT Fix — for a Price

It’s not often that you get something for nothing on Capitol Hill, and that’s probably why Senate Republicans are eyeing this fall’s expected debate over fixing the alternative minimum tax with anticipation. [IMGCAP(1)]

Sure, the GOP shares Democrats’ desire to help 19 million middle-income taxpayers avoid higher taxes under the AMT next year. But the chamber’s minority also figures that the prospect of any tax break moving through the Senate presents prime opportunities to push for more.

“If they want our cooperation, what are they willing to give us in return?” Sen. John Thune (R-S.D.) said.

Indeed, at this past Tuesday’s regular Senate GOP luncheon, Republicans generally settled on a strategy

of trying to use any AMT fix as a bargaining chip to secure extensions of some of President Bush’s controversial tax cuts, including cuts on capital gains and dividend income as well as extension of marginal rate cuts.

“We’ve been supportive of AMT fixes, but I think it’s important that we consider these others,” said Senate Republican Conference Chairman Jon Kyl (Ariz.).

In essence, one strategist with ties to Senate GOP leaders said, Republicans are looking for concessions in exchange for not holding up whatever AMT fix the Democrats come up with.

Still, Kyl cautioned the strategy was not about coercion.

“It’s not a matter of threats,” said Kyl, who also sits on the Finance Committee. “It’s a matter of tax equity and good tax policy.”

But if they don’t get what they want this year, Republicans say they largely are content to let the Democrats figure it out themselves. That’s because GOP Senators are calculating that the majority will either have to offset the cost of fixing the AMT with tax increases or have to break their own “pay-as-you-go” budget rules.

“Democrats are going to raise taxes or bust PAYGO in order to fix a tax many people don’t know about,” Senate Republican Conference spokesman Ryan Loskarn said.

Either way, the thinking goes, Republicans will be able to accuse Democrats of increasing taxes or busting the budget.

“This is a win-win for Republicans,” Loskarn said. “We will get to secure some tax relief and, at the same time, show that Democrats are fiscally irresponsible.”

However, Democrats derided the strategy.

Republicans “haven’t had a new idea since the day [President] George Bush first got elected, and this one isn’t very good either,” said one Senate Democratic leadership aide.

Republicans see the AMT — which was intended to make sure the wealthy pay taxes, but increasingly has been ensnaring people with more modest incomes — as a problem largely confined to “blue states,” in which the standard of living is generally higher, as are people’s incomes. They argue red-state taxpayers would benefit more from extensions of other tax cuts.

Taxpayers in Democratic-leaning states such as California, New York and New Jersey would be hit hardest if Congress doesn’t fix AMT, but a recent study by the House Ways and Means Committee’s Democratic staff showed many Republican districts would be affected in those states.

Senate Finance ranking member Chuck Grassley (R-Iowa) declined to comment on the GOP’s AMT strategy but said he would be pushing Senate Finance Chairman Max Baucus (D-Mont.) to consider a permanent fix to the AMT problem — something that could cost more than $800 billion over 10 years — without paying for it, because the federal government never should have banked on getting this money in the first place.

“It raises revenue from people it was never intended to affect,” Grassley said.

Still, Majority Leader Harry Reid (D-Nev.) pledged last week to stick to PAYGO rules when it comes to AMT or any other tax packages that move through Congress.

“Whatever we do, it will be fully paid for,” Reid said.

That’s probably why Baucus is looking to do a roughly $135 billion two-year AMT patch to get Democrats through the 2008 elections, instead of trying to pay for a nearly $1 trillion tax package.

Still, even the relatively modest two-year patch could be difficult to find offsets for, especially if Democrats continue to be sensitive to accusations that they want to raise taxes.

Plus, Grassley and Kyl noted that Republicans would strongly resist any AMT fix that even appears to increase taxes.

“You’ll have Republican opposition to increased revenues and even closing [tax code] loopholes,” Grassley said. “So maybe we can do it without an offset.”

That’s not entirely off the table as far as some Democrats, including Baucus, are concerned, the Senate Democratic leadership aide said.

“The only thing we are completely wedded to opposing is the stupid House idea of how to fix AMT. We are not going to raise taxes,” the aide said.

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