Is AMT Fix a Debt Solution?

Vacuum Left by Implosion of VP’s Talks Gives Openings for Other Proposals

Posted June 28, 2011 at 6:30pm

Some Democrats seeking a broad bipartisan deficit deal are eyeing a $700 billion carrot to bring Republicans on board.

Senate Budget Chairman Kent Conrad (D-N.D.) said this week he believes Republicans could be enticed to vote for controversial revenue raisers if Democrats promised to provide permanent relief from the alternative minimum tax — which for years has bedeviled both parties as they’ve watched the tax intended for the wealthy threaten middle-income Americans.

“The alternative minimum tax is in the law now, and we’re going to have to reform it,” he said. “That is going to lose revenue. Replacing that revenue is clearly not a tax increase. And you’re talking, you know, between $600 [billion] and $700 billion right there of revenue that’s not a tax increase. It’s simply replacing revenue that’s already in the code.”

Conrad said nobody expects Congress to simply let the AMT hit the middle class. And Congress typically has prevented that from happening every year without paying for it.

Offsetting AMT relief with revenue elsewhere could help generate the cash needed to reach an overall bipartisan $4 trillion deficit reduction goal, Conrad said.

“That’s a big chunk of the $1.1 trillion [of revenue] we need,” he said, adding that he’s talked to a number of Republicans who believe the AMT could provide a pathway to a deal.

Conrad is a member of the original “gang of six” Senators seeking a big bipartisan budget deal, and the group has continued to meet without Sen. Tom Coburn (R-Okla.), who announced last month that he was taking a sabbatical from the group.

Since Coburn’s departure, Democrats have stepped up their efforts to recruit other GOP Members to join the group and have urged the remaining Republicans — Sens. Mike Crapo (Idaho) and Saxby Chambliss (Ga.) — to finalize a deal and present it to the Senate even without Coburn on board. That push gained urgency after the bipartisan debt limit talks led by Vice President Joseph Biden collapsed last week.

“I think we ought to come forward with what we’ve done and use it as guidance or a template of where we might go, but they’ve got to come to that same conclusion,” Senate Majority Whip Dick Durbin (D-Ill.), another member of the gang, said last week.

One GOP source said some Republicans are intrigued by the AMT idea, although it’s much easier to reach a deal that can be sold to Republicans as revenue neutral than one that includes significant revenue that exceeds the AMT fix.

Conrad also said he’s pushing to eliminate offshore tax havens that he said allow companies to effectively cheat on their taxes.

Republicans are also struggling with whether it would help or hurt the ultimate prospects for a bipartisan plan if a broad group of Senators announced a deal without a sign-off from House Republicans — or the White House.

Another idea that has been talked about in bipartisan discussions is using a “chained CPI,” which would recalculate the Consumer Price Index. Tax deductions, rate brackets and a variety of government payments are tied to the Consumer Price Index.

One argument Republicans have been making to Democrats is that a broader tax reform bill that lowers overall tax rates would generate far more revenue than budget experts estimate because of the dynamic effects a simpler tax code would have for the economy. The trick for Republicans, who have repeatedly vowed not to support tax increases, is whether a package can be put together that includes components such as AMT relief so they can say it isn’t a tax increase.

“The question is whether you can do it without it explicitly being a revenue raiser,” the GOP source said.

Grover Norquist, president of Americans for Tax Reform, said in an email Tuesday that a revenue-neutral AMT fix would comply with the anti-tax pledge most Republicans have signed. Norquist said chained CPI would be “very bad” if applied to taxes because it would gradually raise tax revenue.

The AMT was created to tax wealthy individuals who had used loopholes to avoid paying taxes. But it was never indexed for inflation and threatens to engulf much of the middle class in much higher tax rates.

The Congressional Budget Office last week projected that unless Congress acts, the AMT would affect nearly half of all households by 2035, compared with just 3 percent this year.

And offsetting the AMT with higher tax revenue elsewhere isn’t a new idea. President George W. Bush’s administration, back when now-Sen. Rob Portman (R-Ohio) was budget director, proposed a revenue-neutral AMT fix that would require higher revenues elsewhere as part of a plan to balance the budget.

But Democrats have generally demanded there be some net increase in revenue and have stepped up their attacks on a host of corporate tax breaks that include offshore tax havens, private jets, oil companies and the like.

Other Senators are also launching trial balloons aimed at jump-starting the debt talks. Coburn and Sen. Joseph Lieberman (I-Conn.) proposed a plan Tuesday to slice $600 billion from Medicare during the next decade by raising premiums and the retirement age.

But the plan was immediately panned by House and Senate Democratic leaders — including Durbin, Coburn’s gang of six colleague.

“Leaving people at the tender mercies of health insurance companies for two more years before they’d be eligible for Medicare, I think that’s really a problem,” Durbin said.

Lieberman said he hoped the duo, dubbed the “brothers two,” could create a “bipartisan beachhead” and alluded to the gloom many Senators feel.

“They’re really downcast about the failure of the process here as we head toward the debt ceiling vote, and perhaps we offer a little hope that at least two of us can get together across party lines,” he said.