Senate passes legislation to block tax increase

updated 8:50 p.m. ET Dec. 6, 2007

WASHINGTON - The Senate voted Thursday to block a looming tax increase averaging $2,000 for millions of taxpayers after Senate Republicans succeeded in thwarting a Democratic plan to also raise taxes on investors.

The Senate bill, passed 88-5, provides a one-year fix for the alternative minimum tax but without matching the cost of the tax relief with new tax revenues. Without the fix, an estimated 25 million people would be subject to the higher AMT tax, up from 4 million in 2006.

The Senate vote puts the body at odds with the House, where Democratic leaders, under a principle of not adding to the national debt, demanded that the AMT fix be paid for. Last month, the House passed legislation matching the AMT fix and other tax cuts with about $80 billion in new tax revenues.

Senate Finance Committee Chairman Max Baucus, D-Mont., said it was not his first choice to pass an unpaid-for bill but “this is our best choice.” He said 12 million people in the $100,000 to $200,000 income level alone would be hit by the AMT without the fix, and “we need to stop that from happening.”

The bill now goes back to the House, where Rep. Charles Rangel, D-N.Y., chairman of the tax-writing Ways and Means Committee, suggested making up the difference by closing a loophole on offshore funds that now escape taxation.

Dems’ tax policy faces criticism
Earlier Thursday, Senate Republicans united in stopping the Senate from moving to the House-passed bill. The vote was 48-46 against beginning debate on the House bill, 14 short of the 60 needed.

The Finance Committee’s top Republican, Charles Grassley of Iowa, said it was time for Democrats to abandon their “PayGo obsession,” referring to the “pay-as-you-go” principle that tax cuts or spending increases should be paid for so as not to add to the federal deficit. With the “clean” AMT bill, “the Senate Democratic leadership seems to realize that the AMT should not be offset,” he said.

House Democratic leaders throughout the day Thursday reaffirmed their commitment to PayGo.

Republicans, said House Majority Leader Steny Hoyer, “complain that we pay for this legislation by closing tax loopholes. Their solution? Just add the costs of the AMT fix ($50 billion) to the deficit and national debt. I absolutely reject this fiscally irresponsible approach.”

IRS may delay processing returns
Without congressional action, the IRS, unsure of the final status of the tax, says it may have to postpone the processing of returns scheduled to begin in mid-January.

That could mean delays for millions of people waiting for income tax refunds worth billions of dollars. The tax agency says it will take about seven weeks after the tax is revised to reprogram and test forms reflecting the changes.

For weeks, Democrats and Republicans have blamed the intransigence of the other party for the delay. “The Democrats’ unprecedented and indefensible delay on this commonsense solution means the filing season will already be disrupted,” Senate Republican leader Mitch McConnell, R-Ky., said.

“They find it offensive to have to pay for these tax cuts,” Senate Majority Leader Harry Reid, D-Nev., said of Republicans. “This is a $50 billion patch. Shouldn’t it be paid for? The answer is obviously ‘yes.”’

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