House tax vote spares millions

WASHINGTON – Capping a spirited debate, House members voted Friday to shield more than 23 million Americans from a tax increase this year under the alternative minimum tax – and hit up wealthy managers of investment firms such as private equity and hedge funds to pay for it.

The 216-193 vote, which closely followed party lines, escalated an emerging political battle over tax priorities, after years of Republican anti-tax fervor. While members of both parties overwhelmingly wish to defuse the alternative minimum tax, they have a sharp dispute on how to do it, and the future of the tax increase planned for rich investors is doubtful.

Many Democrats seek to shift the tax burden toward the richest Americans, while many Republicans argue that the bill was just the first step toward major tax increases that they say are sought by Democrats, who now control both houses of Congress.

“I feel like the little boy in Holland sticking his thumb in the dike,” said Rep. Jim McCrery of Louisiana, senior Republican on the Ways and Means Committee. “If I’m not here today about to stick my thumb in the dike … we’re going to have a torrent, a flood of tax increases over the next 10 years.”

Democrats contended that the proposal would restore fairness to the nation’s tax structure.

“How can you possibly call it a tax increase when we’re trying to bring some degree of equity to the system?” asked Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee and the main author of the tax plan.

The debate now shifts to the Senate, where the tax increase is extremely controversial, including among some Democrats who have received big campaign donations from investors who would face higher taxes under the plan. The Bush administration already has said it would veto a tax increase.

Meanwhile, the Internal Revenue Service has warned that action on the alternative minimum tax is required soon to prevent disruptions for 2007 taxpayers.

The tax was created in 1969 to guarantee that a small number of the nation’s richest households pay at least some taxes. But because the provision was not indexed for inflation, it has threatened to pinch a growing number of Americans, forcing Congress to repeatedly defuse it.

It potentially looms over families who earn $75,000 or even less, although the biggest impact is on more affluent households.

The bill approved Friday would shelter millions of families from the alternative minimum tax while making up the lost tax revenue by requiring managers of investment partnerships, such as private equity funds, to pay ordinary income tax rates on more of their income, rather than a lower capital gains rate. In many cases, such a change on the treatment of income – known as “carried interest” – would raise the tax rate for well-heeled fund managers to 35 percent from the current 15 percent.

The bill also would restrict the ability of very affluent Americans, notably hedge fund managers, from reducing their tax rates through the use of offshore tax shelters.

In addition it would extend a handful of tax provisions affecting individuals and businesses that were scheduled to expire this year.

These include provisions that allow for itemized deductions of state and local sales taxes, and continue a tax break for tuition expenses.

The bill also would extend the research and development tax credit used by businesses and a tax credit for investments in financial institutions that serve low-income communities.