Tax Fairness Wins in the House of Representatives;
Battle Ahead in the Senate

On Friday, the U.S. House of Representatives voted 216-193 to pass H.R. 3996, a bill to extend relief from the Alternative Minimum Tax and other tax breaks for one year and offset the costs by reducing tax loopholes for private equity fund managers and others. All but eight Democrats present voted for the bill, while all the Republicans present voted against it.

The AMT provision is known as a "patch" because it prevents the AMT from reaching millions of more taxpayers (as the AMT is scheduled to do under current law) for a year but does not permanently address this problem. A larger bill (H.R. 3970) was introduced by Ways and Means Chairman Charles Rangel (D-NY) on October 25 to repeal the AMT entirely and offset the costs, mostly with a surtax that would reduce the Bush tax cuts for those families with incomes above half a million dollars a year. This bill is a major tax reform that would make the tax code simpler and more progressive without making the fiscal situation worse than it already is.

But because Republicans seem sure to block any provision that would reduce tax breaks even for the richest Americans, Rangel introduced the smaller bill (H.R. 3996) to patch the AMT for just one year, giving Congress more time to consider his more comprehensive tax reform. H.R 3996 borrows many of the good ideas from the larger bill, like closing the loophole for "carried interest" and a loophole that allows private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes. H.R. 3996 would also extend some business tax breaks (such as the research credit) for one year. Smaller provisions in the bill would make the Child Tax Credit more accessible for poor families and would create an additional standard deduction for property taxes for those who do not itemize their tax deductions.

Surprising Amount of Focus on "Carried Interest"

The Republicans chose the counter-intuitive strategy of rallying around one of the most offensive and blatantly unfair loopholes in the tax code, the loophole for "carried interest," which is a form of compensation paid to certain types of fund managers. This loophole essentially allows these fund managers to earn hundreds of millions of dollars and yet pay taxes at a lower rate than their middle-income receptionists.

Citizens for Tax Justice sent members of Congress a new fact sheet explaining that the loophole is a subsidy paid to millionaires, through the tax code, and funded by the rest of us who are paying income taxes at ordinary rates. The loophole is enjoyed by those who manage other people's money but are allowed to pretend that they're investing their own money -- which entitles them to the low, 15 percent rate for capital gains. Contrary to the confusion sowed by fund managers, the capital gains rate for those who actually invest would not be altered.

Citizens for Tax Justice also issued a statement responding to the claim that the real estate industry would be damaged if the carried interest loophole is closed. The vast majority of people who are affected by what goes on in the real estate industry -- realtors, construction workers and home-buyers -- pay income taxes at ordinary rates like everyone else, meaning that they are paying for this loophole rather than benefiting from it.

Most important, however, was the willingness of hundreds of state and local organizations from around the country to tell Congress that this loophole is simply unfair to ordinary taxpayers in their states. Thanks to all the organizations that joined the sign-on letter urging Congress to close the loophole.

Battle Ahead in the Senate

Several in the Senate have suggested that it will be difficult to secure the 60 votes needed to avoid a filibuster in their chamber and approve this bill. Many Republican Senators, including the ranking Republican on the Finance Committee, Charles Grassley (R-IA) have made clear that they would rather increase the federal budget deficit than pay for AMT relief. We would suggest that any anti-tax conservative in the Senate who wants to take responsibility for filibustering AMT relief for millions of taxpayers should go ahead and do so to make his or her position clear to the public.

State Tax Justice News

Election Results are In!

Last Tuesday voters made their voices heard on a variety of tax related issues. In Washington State it appears that anti-tax radical Tim Eyman won another initiative battle. The passage of Initiative 960 makes it more difficult for the state to raise needed revenue, but does little to increase government transparency or encourage economic development. Opponents of the measure rightly say that I-960 will increase dreaded red tape and bureaucracy. Read an FAQ about the initiative from the Washington Tax Fairness Coalition here. 

But in a victory for tax justice, an earlier Eyman initiative has been ruled unconstitutional. This 2001 initiative, I-747, capped state and local property tax collections at 1 percent each year, unless a higher increase was approved by voters. Be on the lookout for more on how Washington responds to the passage of I-960 as courts may get involved again.

Elsewhere in the Pacific Northwest, a ballot initiative to raise cigarette taxes and to use the funds to provide universal health care for children was defeated in Oregon, due in large part to the $12 million spent by RJ Reynolds and other tobacco companies to oppose it.  Governor Ted Kulongoski, one of the initiative's key backers, has vowed to continue the fight for expanding health care. 

To read about the outcomes of ballot measures across the country check out this report from the Ballot Initiative Strategy Center.

Tax Cuts for Sale

If the facts aren't on your side, why not just buy yourself a favorable change in tax policy?  Well, federal authorities are now investigating whether that sort of approach helped to get legislation to cut capital gains taxes passed in Rhode Island a few years ago.  As the Providence Journal reports, former House Majority Leader Gerard Martineau recently plead guilty to two federal corruption charges for the business relationships he maintained with CVS and Blue Cross & Blue Shield while a member of the Assembly and "could still face charges for influencing capital-gains tax-cut legislation" at the request of the former company, the nation's largest retail pharmacy chain. 

In 2002, despite scant evidence that tax breaks on capital gains promote economic growth, Rhode Island enacted legislation to gradually eliminate the taxation of capital gains held for five years or more.  As the Rhode Island Poverty Institute notes, the Assembly froze the scheduled reduction this year, but in light of the state's continued fiscal problems and the sordid manner in which the initial legislation may have been adopted, restoring the tax should be at the top of the Assembly's agenda in 2008.

A Progressive Plan for Property Tax Relief in Vermont

Vermont is among the states considering replacements for its property tax, but like much about the Green Mountain State, legislators there take a very different approach than their counterparts elsewhere around the country.  According to the Burlington Free Press, members of the House Ways and Means Committee have agreed to review a bill later this month that would repeal the existing residential property tax that is earmarked for education and replace it with an income tax dedicated to the same purpose.  Municipal property levies and the statewide property levy for non-residents would be unaffected.