Senate sets relief from alternative minimum tax

WASHINGTON —  The Senate voted Thursday to shield about 20 million middle-class taxpayers from an unexpected tax hike this year, bringing Congress a step closer to ending a bitter debate that has dragged on so long it threatens to delay refunds next year.

But the deal worked out between party leaders to prevent the alternative minimum tax from snaring more Americans does not comply with the budgetary guidelines Democrats enacted this year to rein in the national debt.

It now faces an uncertain fate in the House, where Democrats have insisted that the $50 billion lost by not collecting the AMT for these filers be offset with new revenue. The House passed an AMT plan last month that balances the tax relief with additional taxes on wealthy investors.

The fix approved Thursday in the Senate included no offset, reflecting unyielding Republican resistance to any new taxes to pay for tax relief.

The compromise passed the Senate 88 to 5, with the only dissenting votes coming from Democrats.

“This is our best choice,” Senate Finance Committee Chairman Max Baucus (D-Mont.) said on the Senate floor Thursday night. “We need to act.”

In a statement, President Bush praised the Senate’s action and urged the House “to swiftly pass this bill.”

The center of the legislative action now shifts to the other side of the Capitol, where Democratic leaders have indicated they will seek other ways to pay for the AMT fix.

House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.) said Thursday he is interested making up lost revenue by placing new restrictions on the ability of hedge-fund managers to shield income offshore.

Thursday’s vote ended weeks of intense feuding between Democrats and Republicans in the Senate over an arcane tax provision that most taxpayers never see.

Congress created the alternative minimum tax in 1969 to guarantee that the nation’s richest households pay at least some tax. But because the provision -- which requires some taxpayers to calculate their tax bill with an alternative formula -- was not indexed for inflation, it has threatened to pinch a growing number of Americans.

In the past, Congress has made repeated short-term fixes to avoid ensnaring middle-income taxpayers. An estimated 4 million taxpayers paid the AMT last year.

But this year, the proposed short-term fix became caught in a spirited debate about fiscal responsibility.

When they assumed the majority in January, Democrats pledged that they would be better fiscal stewards than their Republican predecessors, who presided over years of budget deficits and a rapidly expanding national debt that tops $9 trillion.

Democrats adopted pay-as-you-go rules that require lawmakers to offset increased spending or tax cuts by finding revenue elsewhere to balance the national checkbook.

Faced with a $50-billion hole if they shielded millions from the AMT, House Democrats looked to some of the country’s wealthiest taxpayers.

They proposed raising the tax rate on some investment-fund managers and partners in private equity firms, many of whom make millions of dollars but pay only a 15% tax on much of their income, which they classify as capital gains.

If they were subject to the standard income tax, they would pay a 35% rate like other high-income Americans.

But Republicans argued there is no need to make up the lost revenue because the tax was never intended to hit middle-income taxpayers.

When the measure came before the House last month, it passed 216-193 without a single GOP supporter.

In the Senate, where Democrats hold a one-vote majority, Republican lawmakers were able to use Senate rules to block any consideration of the House AMT bill. “We are not going to agree on raising taxes,” Sen. John Cornyn (R-Texas) said on the floor Thursday.

Democrats assailed their counterparts for obstructing the much-needed legislation. The delay in patching the AMT has already slowed the processing of tax refunds, according to the Internal Revenue Service.

Democrats could not muster the 60-vote supermajority needed on an earlier procedural vote to bring the House measure to the floor as every GOP senator voted no.

The breakthrough occurred only Thursday evening as Senate Democrats agreed to drop their insistence that the cost of the AMT patch be offset.

All five presidential candidates in the Senate -- Joseph R. Biden Jr. (D-Del.), Hillary Rodham Clinton (D-N.Y.), Christopher J. Dodd (D-Conn.), John McCain (R-Ariz.), and Barack Obama (D-Ill.) -- missed both votes.

noam.levey@latimes.com