WASHINGTON – More than 20 million families will be spared an extra $2,000 tax hit on average after Congress excluded them from a higher alternative tax originally aimed at untaxed multimillionaires.
An eleventh-hour vote on Wednesday to put a one-year freeze on growth of the alternative minimum tax shields many middle- and upper-middle-income taxpayers from first exposure to the tax. In 2006 it affected 4 million.
President Bush plans to sign the bill into law.
But by waiting until the last day of the session, less than a week before Christmas, Congress left in question whether the Internal Revenue Service can adjust its forms in time for the 2008 filing season to begin in mid-January. Delays in processing returns could put off refunds to millions of people needing the extra cash for holiday expenses.
IRS acting Commissioner Linda Stiff said the agency would immediately begin reprogramming forms, a process the IRS has said could take about seven weeks. “Our people will do everything they can to quickly update our systems for this major change,” she said in a statement.
The independent IRS Oversight Board, in a report on the possible consequences of a delay, predicted that a Feb. 4 start for the filing season would entail a delay in issuing about 13.3 million refunds worth $39 billion.
One-year fixes have become an annual congressional ritual for a tax that was enacted in 1969 to catch a small number of very rich tax dodgers but has come to entrap many more people because the tax was never adjusted for inflation. The tax has alternative, more stringent rules for claiming deductions. Many of the beneficiaries of the AMT fix are people with incomes in the $75,000 to $200,000 range.
This year, however, action on the fix was held up by a philosophical divide between the two parties. The new Democratic majority in the House, committed to “pay-as-you-go” rules requiring that tax cuts and mandatory spending increases be covered by tax increases or spending cuts so as not to add to the deficit, demanded that the $50 billion cost of the tax relief be paid for, mainly by closing a loophole on offshore tax havens.
Republicans, backed by a presidential veto threat against any tax increase, insisted that the AMT was never meant to affect millions of people and thus shouldn’t be fixed with increased taxes.
White House press secretary Dana Perino welcomed passage of a bill without a tax hike. “The AMT was never intended to hit these middle-class taxpayers, and the last thing they or the U.S. economy needs is a tax increase,” she said.
The Republicans prevailed. On Tuesday night the Senate for a second time rejected the House-backed approach of a paid-for AMT bill. With that vote, the House reluctantly took up the Senate bill that had no sources of revenue to cover the costs.
House Majority Leader Steny Hoyer, D-Md., said, “We are forced to recognize today that we don’t have the votes to pursue the pay-as-you-go principle.”