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Senate Stuck on AMT Fix

Senate Democrats and Republicans appear headed for a potentially dangerous political game of chicken over the alternative minimum tax, as both seek to make sure millions of middle-class Americans do not see a tax hike next year even as they battle over whether to pay for the expensive fix.

Though Democrats publicly remain committed to finding offsets for a one- or two-year AMT patch, a private intraparty debate is roiling between Democratic Senators who foresee a political train wreck in trying, and likely failing, to raise taxes — even on the wealthy — and those who do not want to be accused of hypocrisy on fiscal issues. Meanwhile, Republicans appear to be closing ranks against anything that even smells like a tax increase.

“I have no idea what we’re going to do yet,” Senate Finance Chairman Max Baucus (D-Mont.) said last week. “I won’t know until we see the [House] bill and until I’ve talked more to Members.”

Sen. John Kerry (D-Mass.), a Finance member, added, “There’s a lot of disagreement on what the offset ought to be.”

One Senate Democratic aide said party leaders likely would “tease out” this week who is “willing to stick by the principle” of pay-as-you-go rules for any new spending or tax cuts. Sixty votes are needed to waive PAYGO in the chamber.

Regardless of what Senate Democrats find among their own ranks, Republicans have threatened to filibuster any AMT bill that raises taxes or includes what they consider other onerous offsets.

“Republicans are absolutely committed to two things: fixing the AMT and doing so without raising taxes,” said one Senate GOP leadership aide. “Unless Democrats are willing to tell millions of people that they screwed up [tax] filing season and failed to fix the AMT, they’re going to have to push a bill that Republicans will support.”

But the Senate Democratic aide said Senate Majority Leader Harry Reid (D-Nev.) and other Democrats’ public commitments to pay for the AMT fix is rooted in principle.

“There is a certain pressure to stick with PAYGO because you don’t want to give away the high ground on fiscal discipline that the Democrats have begun to stake out. … If Democrats make a stand on PAYGO, it at least puts Republicans in the position of having to answer why they blocked AMT relief for the middle class.”

But another Senate GOP aide said Republicans “are bulletproof on this” because they consistently passed AMT relief when they were in the majority.

Other Democratic aides said sticking to PAYGO in the face of a likely successful Republican filibuster and a threatened presidential veto could lead to political suicide for the Democratic majority.

“The best thing politically is to not pay for it,” said one senior Senate Democratic aide. “Once Senate Democrats see the list of options to pay for this, they’re not going to want to pay for it anymore.”

The aide added that the House AMT bill, which offsets the nearly $80 billion cost of a one-year AMT patch by raising taxes on hedge funds and private equity partnerships, would be dead on arrival in the Senate.

“The House strategy is suicidal. They’re going to make us vote on tax increases that the president won’t sign, and we’re going to have to turn around and get rid of PAYGO,” said the senior Senate Democratic aide. “There’s no way Bush is going to sign anything that Democrats would give him that would pay for it.”

While Reid has vowed to pay for AMT, Baucus has stopped short of promising such an outcome, saying simply it is his “goal to get it paid for.” Still, Speaker Nancy Pelosi (D-Calif.) said Friday that she had “an understanding with the Senate that this legislation must be paid for.”

Pelosi managed to muscle the AMT across the finish line last week despite discontent among some conservative Democrats and some nervousness about the political implications of the vote.

The vote was touted less as a political victory than as a moral one, with Democrats showing that they could live up to the PAYGO principles they had long touted while taking on a group of private money managers who have made huge profits in recent years while paying little in taxes.

But Democratic leaders still took friendly fire. Rep. Jim Cooper (D-Tenn.) ripped the bill for pushing out much of the pain to 2016 through the use of accounting gimmicks. “It’s going to take us 10 years to pay for a one-year fix. This isn’t PAYGO. It’s a fig leaf,” Cooper said. “It’s astonishing. We’re better than this.”

Cooper said Democrats also need to make a real effort to cut spending as part of PAYGO, not just rely on taxes.

Rep. Tim Mahoney (D-Fla.), one of the more vulnerable Members, meanwhile sent a letter to leaders urging them to hold off on the AMT vote and reconsider plans to change tax provisions enjoyed by real estate partnerships as well as private equity firms. Mahoney said he applauds leadership for trying to be fiscally responsible but said he’s concerned about the impact on development.

“You want to reward people for taking risks,” he said. “How about budget cuts to make government more efficient? We need to show people we are good managers and stewards of their money. I’ve been here 10 months and I haven’t seen one proposal to cut spending.”

The AMT, originally instituted in the 1960s to make sure wealthy taxpayers paid a minimum amount of tax, now threatens to increase taxes for nearly 19 million middle-class taxpayers next year because it was never indexed for inflation.

Despite warning from the Treasury Department that it needs a bill by the end of this week to avoid printing incorrect tax forms, Reid said last week that he had no plans to bring up an AMT fix this week.

Reid spokesman Jim Manley explained: “Republicans have made it crystal clear that they will block passage of the House bill in the Senate, because they don’t believe the AMT relief should be paid for — even by closing tax loopholes. And to add insult to injury you even have some Senate Republicans demanding tax breaks for the wealthy in return for passing AMT relief for 19 million Americans.”

Manley added, “The Majority Leader will continue discussions with the Republican Leader on how to proceed.”

But Republicans are trying to keep the pressure on.

“We have little time left. Congress can’t delay further,” Senate Finance ranking member Chuck Grassley (R-Iowa) said in a statement following House passage last week. “This legislation will come to the Senate. I implore the Senate Democratic leadership to … work with the Senate Republican leadership to change this legislation to a form that can be passed by the Congress and signed by the president.”

Democrats said they are working as quickly as possible.

“Chairman Baucus is perfectly aware of the need to move in an expeditious way,” said one Baucus aide. “He’s keeping the IRS abreast step-by-step of the committee’s actions.”

Indeed, Baucus indicated last week that he expected the IRS to make AMT changes on tax forms before Congress actually acts, given that he wrote to the agency Oct. 30 of his intention to address the AMT situation.

“We sent a letter over to the IRS that we’re going to pass an AMT patch, and we will,” Baucus said. “AMT will get solved this year.”

Meanwhile, Senate Democratic aides said there is some suspicion that the Bush administration has pressed Treasury to increase the rhetoric regarding the Democrats’ failure so far to pass an AMT fix this year.

“Expiring tax provisions that affected forms for millions of taxpayers went unaddressed until December in the last Congress, but you didn’t see Treasury putting out a lot of dramatic press releases then,” noted one Senate Democratic aide.

While Republicans passed last year’s AMT patch in May 2006, they did not pass until December a large package of tax extenders that affected individual income tax forms. That forced the IRS to print new forms and send out special mailings.

Steven T. Dennis contributed to this report.