Could New Hampshire be the next state to enact a broad-based personal income tax? The Granite State is one of only nine states that do not currently levy such a tax, and an ongoing school funding debate is leading otherwise tax-averse lawmakers to look for ideas on how adequate school funding could be paid for. An excellent op-ed by state Representative Jessie Osborne asks the hard questions.

Osborne isn't shy on this point, having introduced legislation this year that would take a bold and progressive step towards a more sustainable-- and equitable-- New Hampshire tax system. In the rep's own words, here's the plan:

HB 1593 establishes a combination statewide "enhanced education" property tax at $5.50 per $1,000 of equalized assessed valuation, with a $200,000 homestead exemption; and a 4 percent education income tax with liberal income exemptions and a credit for the statewide property tax the household pays. These taxes replace the current interest & dividends tax and business enterprise tax, which are both repealed totally; the bill also reduces the business profits tax to 7.5 percent. The bill also contains a circuit breaker (abatement) program for taxpayers whose total property tax bill (municipal, school, county and statewide property taxes) exceed 8 percent of household income. In short, this bill bases the financing of education on ability to pay.

Which sounds like a great place to start. The "ability to pay" goal has two important components here.

First, and perhaps most important, the bill would take an existing tax that is notoriously insensitive to "ability to pay" considerations, the property tax, and add a feature (the circuit breaker) that would go a long way toward solving this problem.

Second, the bill would enact what is generally recognized as the fairest tax out there-- a broad-based personal income tax.

Osborne has no illusions that the bill could survive a veto threat this year, but is to be commended for introducing legislation that gets right at the heart of what's wrong with the current New Hampshire tax system.

The full text of the bill can be found here.

Negotiations between House Speaker Nancy Pelosi, Minority Leader John Boehner and Treasury Secretary Henry Paulson resulted yesterday in an agreement to spend about $146 billion to jumpstart the economy. About two thirds of that would go towards tax rebates for households, and a third would go towards tax breaks for businesses. The tax rebates would be targeted toward middle-income taxpayers, including working people who pay federal payroll taxes but who do not have enough income to owe federal income taxes. However, the rebates would provide no help for people who do not have earnings (including the unemployed and many Social Security and welfare recipients) even though these people are arguably the most likely to spend any money given to them, thereby pumping the money immediately into the economy.

Some Democrats in the Senate, like Finance Committee Chairman Max Baucus (D-MT) have expressed an interest in adding increased unemployment benefits or food stamps to any stimulus package to reach these people. It appears that Speaker Pelosi felt forced to give up demands for increasing these benefits in order to get the Bush administration to agree to making the tax rebates available for more lower-income people.

The Tax Measures

The rebates would be a maximum of $600 for singles and $1,200 for married couples. For people whose tax liability is below $600 (or $1,200 for couples), the rebate would be equal to tax liability, and a minimum benefit of $300 for singles and $600 for married couples would be available so long as they have at least $3,000 in earnings. Finally, an additional $300 for each child would be available to anyone with any earnings.

The rebates would begin to phase out for singles with incomes of $75,000 and married couples with incomes of $150,000. As a result, they would be more targeted towards the middle-class than any tax bill we've seen during the Bush years.

The tax rebates would be advances on a one-year reduction of the 10 percent income tax rate to 0 percent for the first $6,000 of income for singles or $12,000 of income for married couples for 2008.

The business tax breaks would consist of so-called bonus depreciation (allowing businesses to immediately write off 50 percent of equipment and other capital) and doubling the amount of certain investments that small businesses can immediately expense from $125,000 to $250,000.

The Spending Increases that Were Left Out

Several advocacy organizations have called attention to the fact that the whole point of an effective stimulus is to put money in the hands of people who are most likely to spend that money right away to increase demand and provide an immediate boost to the economy. The stimulus proposal announced yesterday, however, would give smaller tax rebates to those people who work and pay federal payroll taxes but have incomes too low to pay federal income taxes.

Another group who would likely spend any money given to them includes those with no or very little earnings, who could be helped with increased unemployment benefits or food stamps. An expert with Moody's Economy.com has studied the effects of different stimulus measures on the economy and finds that increased UI benefits and food stamps provide the greatest increase in demand for each dollar spent. Business tax breaks, on the other hand, produce relatively little demand for each dollar spent. Investment usually takes quite a while to plan and implement and most investment is made by businesses that would not have tax liability anyway.

These aspects of the plan are very troubling, but they are not sufficient reason for members of the House to oppose it. The plan does provide some help for low-income and middle-income people, and House passage could be followed by a much improved bill in the Senate. Hopefully, this could lead to a final bill that does more for the economy and for Americans who need help.

The Republican presidential candidates have all promised to make the Bush tax cuts permanent if elected. This would cost $5 trillion in the first decade alone and most of the benefits would flow to the top 5 percent (or 1 percent if the AMT is not fixed). Any attempt to put our fiscal house in order while extending these tax cuts would require a scaling back of public services that would be truly dramatic and unthinkable, as we've pointed out before. Nonetheless, the GOP candidates are trying to prove that they're even more anti-tax than President Bush. They have apparently decided that the Republican primary voters will not be mobilized and energized by a promise to extend the policies that appear to be in place today. The Republican base wants something more and something new.

Romney's "Stimulus"

Former Massachusetts governor Mitt Romney unveiled a new tax plan last weekend, calling his proposal an "economic stimulus plan" even though most of the provisions would be permanent rather than limited to any temporary, recessionary period. Romney would cut the lowest federal income tax rate (10 percent) down to 7.5 percent, and he would make this change retroactive to 2007 for those with incomes below $97,500. He would also eliminate payroll taxes for people over 65 who are still working and repeats his intention to make interest, capital gains and dividends tax-free for those with incomes below $200,000, even though most people below this level don't enjoy much in the way of investment income.

Who Can Cut Corporate Taxes the Most?

For business, Romney would allow 100 percent "expensing" of equipment for two years retroactive to 2007 and he would cut the corporate tax rate from the current 35 percent down to 20 percent over two years. Last week we reported that Senator John McCain and former New York mayor Rudy Giuliani both want to reduce the corporate tax rate to 25 percent. While some conservatives like to point out that our nominal corporate tax rate is high compared to that of certain other countries, the effective corporate tax rate is certainly quite low because of the loopholes businesses use to avoid taxes. Last year Citizens for Tax Justice found that, measured as a share of GDP, our corporate tax ranks among the lowest among industrialized countries. Both Giuliani's and McCain's plans would create a permanent research credit, and McCain would, like Romney, allow "expensing" of "equipment and technology investments."

Giuliani's Friends Introduce His "Simplification"

Meanwhile, Giuliani's friends in Congress have introduced a bill to implement the former mayor's tax proposal. Called the "Fair and Simple Tax" or FAST, it would lower the corporate rate to 25 percent, lower the capital gains rate to 10 percent, repeal the estate tax, and allow taxpayers the option of using a simplified tax that has three rates, 10 percent, 15 percent and 30 percent. This would be a huge tax break for the wealthy. The 30 percent rate begins at income of $150,000 and we've reported before that most of the current capital gains and dividends tax break goes to the richest 0.6 percent.

Citizens for Tax Justice has produced preliminary estimates showing that Giuliani's tax plan would cost, at least, an eye-popping $11 trillion over a decade.

Nine states currently have no broad-based income tax and, as a result, their tax systems are among the nation's most regressive. This week, legislation was introduced in the most regressive of them all, Washington State, to create a "Working Families Tax Credit." According to the Washington State Budget and Policy Center, the credit would reduce taxes for more than 350,000 Washingtonians by allowing workers to claim a refundable earned income tax credit (EITC) that would be equal to ten percent of the federal credit. While several state have implemented EITCs, Washington could be the first where lawmakers are figuring out that the EITC is an effective measure even in a state with no income tax. The Seattle-Post Intelligencer is right to say that the implementation of this credit would help to offset the regressivity of the nation's most regressive tax structure. For more on this ground breaking legislative priority, read the Budget and Policy Center's full report here.

Minnesota transportation and infrastructure needs have long been discussed and debated, especially in the wake of last year's tragic Minneapolis bridge collapse. As explained in a common sense editorial in the Hutchinson Leader, polling by theMinnesota Chamber of Commerce shows businesses know they need better infrastructure and that taxes are needed to pay for it. "Businesses rely on the transportation system to move freight efficiently and to get employees to work in a timely and safe manner. Growing congestion in the Twin Cities area as well as safety issues on Greater Minnesota roads (70 percent of highway deaths happen in rural areas) has created a significant problem for Minnesota businesses. The editorial also discusses the Chamber's plan for a tax increase to fund infrastructure . For too long business lobbyists have been the enemy of tax hikes, yet clearly some businesses in the North Star state understand the role that taxes play in their ability to meet the needs of their customers and employees.

This week Mississippi Governor Haley Barbour named 37 members of the state's newly formed Tax Study Commission. The business community is heavily represented on the Commission, which is hardly surprising given the Governor's experience as a K Street lobbyist in Washington. Barbour tries to be reassuring by pointing out that the members of the new group "share a common bond in that they are all Mississippi taxpayers." The group's recommendations are due August 31. This comes shortly after Barbour announced in his State of the State address that he would like to complete an overhaul of the state's tax system by the end of his term in office. Let's hope this close look into Mississippi's tax structure takes into account the state's outdated income tax and overall regressive tax structure.

Several Presidential candidates have proposed allowing the Bush tax cuts to expire for wealthy Americans. For Senators Hillary Clinton and Barack Obama, "wealthy" means those with income above $250,000, while for former Senator John Edwards, this means those who make more than $200,000. John Edwards thinks people with incomes higher than $200,000 should pay more in Social Security payroll taxes, while Mitt Romney thinks that people with incomes below $200,000 need a new tax break for investments.

There seems to be a perception that people with incomes below $200,000 or $250,000, depending on who you talk to, are "middle-class" people who deserve every tax break they have ever received.

A new paper from Citizens for Tax Justice finds that in 2008, only 3.2 percent of taxpayers nationwide will have adjusted gross income (AGI) greater than $200,000 and only 2.1 percent will have AGI over $250,000. The paper also shows how many taxpayers have incomes higher than these levels in each state.

It further explores how people are often even more confused when the discussion revolves around the "richest one percent," partly because about a fifth of the public seems to believe they're in the top one percent.

Both the White House and Democratic leaders in Congress are discussing the possibility of some sort of economic stimulus package in the wake of a report from the Labor Department showing that unemployment rose in December from 4.7 to 5.0 percent. While the number of jobs increased overall during the month, the private sector shed 13,000 jobs.

The White House has indicated that the President will announce today the broad principles of a stimulus plan, which will likely involve tax breaks rather than increased spending. The President is said to be considering tax rebates similar to the rebate checks mailed to taxpayers in 2001, as well as extending the existing Bush tax cuts. The latter idea has been panned by economists (including Martin Feldstein, former chief economic adviser to President Reagan) since the Bush tax cuts do not expire until the end of 2010 and therefore extending them could not possibly do anything to counteract a recession taking place today. What's more, the resulting increase in the budget deficit would actually hurt the economy overall.

Democratic leaders and several economists point out that spending could be very effective in stimulating the economy and certain types of tax breaks could be as well, if they were carefully structured. A recent forum on this topic sponsored by the Brookings Institution included Feldstein, former Treasury Secretary Robert Rubin and other economists. They all agreed that any stimulus should be "temporary, timely and targeted." Democratic House Speaker Nancy Pelosi, Ways and Means Chairman Charles Rangel and several other Democratic leaders have echoed these three principles.

The Democratic and Republican House leadership met on Wednesday to discuss the possibility of a bipartisan effort to enact a stimulus package. No deal was reached, but both sides have suggested they could work together to pass legislation quickly. Some House Republicans have indicated that they might offer amendments that would extend the Bush tax cuts but that they will not make their support for a stimulus package conditional on passing such an amendment. Meanwhile, Rangel has said that he is open to including some business tax breaks, even though he may not agree with them, in order to get a bill passed.

However, some dark clouds appeared to form over the discourse on the stimulus package on Friday morning. It was reported that the White House was considering $800 rebates for income tax payers in the 15 percent bracket. Taxpayers in the 10 percent bracket would get only part of the benefit the President is proposing, and those not even in the 10 percent bracket would get nothing.

Meanwhile, the top three Democratic presidential candidates all have their own stimulus plans, although it's not entirely clear how influential they will be on the issue.

Former New York mayor Rudy Giuliani proposed new tax cuts last week that go beyond making permanent the Bush tax cuts (which in itself would cost $5 trillion over ten years). Giuliani proposes to also cut the capital gains rate from its current level of 15 percent down to 10 percent, and to cut the corporate tax rate from 35 percent to 25 percent.

CTJ published a paper this past summer showing that the current tax subsidy for capital gains and dividends cost $92 billion in 2005 alone, and nearly three quarters of that went to the richest 0.6 percent of taxpayers. This regressive tax break would become more costly under Giuliani's proposal.

Senator John McCain of Arizona released his tax plan on Thursday. McCain would also lower the corporate tax rate to 25 percent.

Another CTJ paper from last year found that U.S. corporate taxes as a percentage of GDP are already among the lowest in the developed world, meaning American corporations are not unduly burdened, or made less competitive than those in other countries, by our corporate tax.

McCain would create a permanent credit for research and development. CTJ has criticized the current research credit which, we've noted, has a peculiar following among lawmakers who usually argue that the free market works without government interference. McCain also proposes first-year deduction or "expensing" of "equipment and technology investments." Accelerated depreciation and expensing have in the past been a cause of tax sheltering and distortions in the economy. They can result in certain investments becoming more profitable after-tax than before-tax.

News of the shaky fiscal situation in the states is making headlines. Legislators across the country are contending with slower than expected revenue growth and a weakening economy. In fact, the Center on Budget and Policy Priorities published a report Tuesday showing that at least twenty-one states are facing budget shortfalls. These bleak and uncertain economic times mean that some state officials are toning down the tax cut rhetoric and fiscal belts are tightening. How are governors responding? Here's a quick roundup of State of the State speeches given recently:

New Jersey

New Jersey Governor Jon Corzine has put forward an ambitious proposal of his own to help reduce the state's debt burden and to make needed public infrastructure investments. He has called for a 50 percent increase in tolls on the Garden State Parkway and other major roads every four years. Corzine also wants to create a new entity that would manage those roads and that would have the authority to issue as much as $38 billion in bonds backed by the revenue generated by such toll increases. While higher tolls may be a necessary component of any long term budget plan in the Garden State, New Jersey Policy Perspective's Jon Shure points out that they ought to be considered with an eye towards improving the overall fairness of state fiscal policy.

Idaho

Idaho Governor Butch Otter's State of the State included one good tax policy idea, but failed to provide additional information on one terrible idea that the Governor has championed in the past. In his January 7 speech, the Governor once again proposed improvements to the state's innovative "grocery tax" credit, which seeks to offset some of the impact of the sales tax on food purchases, but suffers from a serious flaw: the poorest taxpayers in the state are unable to receive it. He neglected, however, to discuss his proposal to follow the disastrous lead of Florida and other states and limit the growth of a house's value for property tax purposes until it is sold. Such limitations allegedly help state residents afford to the pay the property taxes on their homes, but, as the experience in Florida has shown, they end up leading to enormous inequities within the property tax, not to mention constraining the revenue needed to provide public services.

Georgia

Georgia Governor Sonny Purdue is singing the same old tired song in this year's State of the State address. In this year's rendition he proposed eliminating the state portion of property taxes levied and removing the tax on retirement and investment income for seniors. Georgia already has a large exemption for retirement income on the books and the state portion of property taxes levied is so small that Georgians would likely see an average tax cut of $30. On a positive note, the Governor didn't endorse House Speaker Richardson's plan to eliminate the portion of property taxes levied to fund schools -- a step in a dangerous direction that Richardson says will eventually lead to the elimination of all property taxes.

California In his State of the State address earlier this month, California Governor Arnold Schwarzenegger outlined his plans for closing the state's $14.5 billion budget gap. As the California Budget Project's summary shows, his plans consist principally of slashing spending on a wide array of public services. Indeed, the Governor maintains that his budget plans would address the shortfall without raising taxes, an approach that has rightly been criticized by numerous observers, including the state's independent Legislative Analyst, Elizabeth Hill.

Both the White House and Democratic leaders in Congress are discussing the possibility of some sort of economic stimulus package in the wake of a report from the Labor Department showing that unemployment rose in December from 4.7 to 5.0 percent. While the number of jobs increased overall during the month, the private sector shed 13,000 jobs.

The White House has indicated that the President has not decided yet whether or not to offer a stimulus plan, but that any package sent to Congress from him would likely involve tax breaks rather than increased spending. The President is said to be considering tax rebates similar to the $300 and $600 "advance" rebate checks mailed to taxpayers in 2001, as well as extending the existing Bush tax cuts. The latter idea has been panned by economists (including Martin Feldstein, former chief economic adviser to President Reagan) since the Bush tax cuts do not expire until the end of 2010 and therefore extending them through 2011 and longer could not possibly do anything to counteract a recession taking place today. What's more, the massive increase in the budget deficit that would probably result could actually hurt the economy overall.

Democratic leaders and several economists point out that spending could be very effective in stimulating the economy and certain types of tax breaks could be as well, if they were carefully structured. A recent forum on this topic sponsored by the Brookings Institution included Feldstein, former Treasury Secretary Robert Rubin and other economists. They all agreed that any stimulus should be "temporary, timely and targeted."

A recent paper from the Center on Budget and Policy Priorities explains why these principles are important. Tax breaks or spending to stimulate demand in order to utilize excess productive capacity in the economy are not needed forever but only through the period in which we face a recession. If the extra spending or tax cuts are permanent, they could actually do more harm to the economy, particularly if they result in ongoing increases in the federal budget deficit.

The stimulus should also be timely, the experts agreed. Legislation that is passed when a recession is starting to abate, or that does not lead to an immediate increase in consumer spending or other immediate economic activity, is probably useless in fighting the recession.
Any stimulus also must be targeted to those who are likely to spend whatever new money they run into. Low-income people are far more likely to immediately spend any extra money they receive in the form of a tax rebate or extended unemployment insurance, for example, whereas higher-income people may be more inclined to save or invest any extra money they receive, meaning it will be a long time before it has any palpable effect on the economy. Targeting the tax cuts or spending might be particularly difficult for members of Congress who want as many of their constituents (not to mention their friends in business) to get benefits as possible.

The Center on Budget paper explains that certain measures have a much higher stimulative impact on the economy because they benefit those who will immediately spend any money they receive. For example, extended unemployment benefits provide $1.73 worth of increased demand for every dollar spent. On the other hand, a tax break for capital gains and dividends provides only 9 cents of increased demand for every dollar of revenue reduced.

Immediate, one-time tax rebates are on the list of measures favored by the experts at the Brookings forum, but they may have to be targeted to low-income families to be truly effective. A survey done in 2001 found that less than a quarter of taxpayers planned on actually spending their rebate checks. The rest would save it, which provides no immediate boost for the economy overall.

One problem is that we often don't know if we're in a recession (technically defined as two consecutive quarters of negative GDP growth) until after it's well underway. We don't know if we're seeing one begin now. Feldstein has recommended that Congress pass a package now that will not actually go into effect until some economic indicators "trigger" it, such as a rise in unemployment over three months.

The ideal scenario would probably involve a stimulus package that includes revenue-raising measures to offset the costs but that do not go into effect until several years later, when a recession would be likely to have ended. But at the Brookings forum and elsewhere, some experts have argued that PAYGO should essentially be waived. This probably reflects a concern that the President and his allies in Congress have taken such an extreme position against raising revenue in any shape or form, while cutting spending in the future may end up hurting those who the stimulus is geared to help.

It's reassuring that House Ways and Means Chairman Charles Rangel (D-NY) has indicated that he agrees that the "temporary, timely and targeted" principles should guide any stimulus proposal. Nonetheless, it's worth wondering whether Congress has the self-control to abide by all these nuanced principles in crafting legislation.

Former New York mayor Rudy Giuliani has proposed new tax cuts that go beyond making permanent the Bush tax cuts (which in itself would cost $5 trillion over ten years). Giuliani proposes to also cut the capital gains rate from it's current level of 15 percent down to 10 percent, and to cut the corporate tax rate from 35 percent to 25 percent.

CTJ published a paper this past summer showing that the current tax subsidy for capital gains and dividends cost $92 billion in 2005 alone, and nearly three quarters of that went to the richest 0.6 percent of taxpayers. This regressive tax break would become more costly under Giuliani's proposal.

Another CTJ paper from last year found that U.S. corporate taxes as a percentage of GDP are already among the lowest in the developed world, meaning American corporations are not unduly burdened, or made less competitive than those in other countries, by our corporate tax.

As lawmakers nationwide debate the morality of applying sales taxes to purchases of groceries and other necessities, it's worth remembering that for governments seeking to provide low-income sales tax relief without blowing a hole in their tax base, there is another way.

The Denver Post has an interesting article from February of 2007 (sorry, a bit behind on my Denver Posts) evaluating the experience of local Colorado governments in providing tax rebates for grocery taxes.

Colorado's state sales tax (which is 2.9 percent) exempts groceries, but locals are allowed to levy a grocery tax. This matters because statewide, Colorado local sales taxes actually bring in more than the state tax.

The article provides details on a couple of the strategies pursued by different Colorado towns and cities to rebate low-income sales taxes on groceries:

Boulder, which collects about $10 million annually in grocery tax, gives a flat
amount: $66 per year for the elderly or disabled and $199 for a family, regardless of size. An individual living alone must make less than $30,450 and be over 61 or disabled. A family of four must make less than $43,500 to qualify.
The rebate in Fort Collins is $40 per year for each person, and single people living alone - it doesn't matter if they are disabled or elderly - must earn less than $24,200 to qualify.
It's the same to qualify in Loveland, but the rebate is $70 per person for up to four people in a home, and food stamps are factored in the rebate amount. Likewise in Greeley, though the base rebate is $45 per person.

As with all such rebates, the main strike against this approach is that unless you apply for the rebate, you obviously don't get it. But the approach taken by these Colorado locals-- tax it, then provide targeted rebates--is worth thinking about for anyone concerned with the unfairness of taxing food.

While 2007 is over and we really want to just move on, it's hard to avoid getting tangled in the battle to interpret what Congress has done on the tax front and why.

Clearly, Congress extended the so-called "patch" that keeps most of us from paying the Alternative Minimum Tax (AMT) and did not replace the $50 billion that the AMT was supposed to collect. As we've reported, it's extremely disappointing that Congress waived the pay-as-you-go (PAYGO) rule that it reinstated when the Democrats took over. But conservatives are still trying to spin this issue into something entirely different from what it actually is.

Let's look at the Wall Street Journal's coverage. I know, I know, we can't respond to every ridiculous thing the WSJ says because that in itself would be a full-time job for a staff of one-hundred. But they exemplify the sort myth-making that is still going on about the AMT and about the two parties' positions on it.

"...because it isn't indexed for inflation, and because Democrats raised AMT rates in 1993 to 26% and 28% from a single rate of 24%, the AMT has turned into a blob that sucks in ever more taxpayers earning between $75,000 and $200,000 a year.

Now back in the majority, Democrats have found themselves hoist on their own 2006 campaign pledge for "pay as you go budgeting," which meant offsetting any AMT tax "cut" with $50 billion in other tax increases or spending cuts. Mr. Bush and Republicans sensibly argued that, because it was never intended to hit so many people, the AMT shouldn't be used as an excuse to raise taxes on other Americans. And with an election year coming, Senate Democrats didn't want to raise taxes on their rich hedge-fund donors. So House Democrats had little choice but to abandon "paygo" as well and pass AMT relief without any offsetting tax increases.

This is good news for the economy, which is struggling enough without a new tax on private equity or other risk takers... "

In these few paragraphs I immediately spot at least five statements that are... Well, I'll just say it: There are at least five blatant, bald-faced lies in these paragraphs.

1. The Democrats are responsible for the expanding reach of the AMT. As this blog has already explained, first, the Clinton AMT changes of 1993 actually reduced the growth of AMT liability, and, second, failure to index the AMT for inflation is a bipartisan failure, equally attributable to the folks who run Congress now (Democrats) and the folks who ran it for the previous 12 years (Republicans).

Just take a step back and think for one second about how ridiculous it is for the party that has controlled Congress from 1995 through 2006, and controlled both Congress and the White House for six years, and passed several tax bills that did not permanently fix the AMT, to blame the Democrats for not permanently fixing the AMT.

But it's particularly absurd to claim that Democrats are responsible for this problem because the Bush tax cuts greatly increased the number of people who are subject to the AMT. Since the AMT is an alternative tax that kicks in if it's greater than your regular income tax, there will clearly be more AMT payers if you lower the regular income tax rate without making a corresponding change to the AMT, which is what the Bush tax cuts did.


2. AMT relief does not represent a new tax cut, since no one expected the AMT's reach to expand. The editorial puts the word "cut" in quotation marks as if to suggest that AMT relief is really not a tax cut at all, buying into the Republican talking points that this measure somehow prevented a tax increase that was never supposed to happen and therefore does not constitute a new tax cut.

First of all, President Bush and his aides knew full well that when they cut regular income taxes, they were making a conscious choice not to change the AMT, which would increase the number of AMT-payers because the AMT would take back a large chunk of the tax breaks. In fact, Bush's chief economic advisor during his first campaign was adamant that Bush's plan contemplated a huge increase in the AMT.

Since the cost estimates for the tax breaks accounted for this fact, this made Bush's first tax cut proposal look less costly than it otherwise would be. But of course it was always a sham. Bush and his allies always knew that the corresponding reductions in the AMT would come later. These AMT reductions would therefore be additional tax breaks. Now the Republicans say AMT relief does not represent a new tax break but simply the prevention of a tax increase that was never expected, and therefore AMT relief doesn't have to be paid for. (So we should just ignore that $50 billion increase in the federal budget deficit.)

Let's talk about just how "unexpected" this situation is. The Center on Budget and Policy Priorities brilliantly explains that several people in the Bush administration and allied with it were quoted early on as stating that the number of AMT payers would clearly increase due to the Bush tax cuts.

One person who is probably feeling absolutely humiliated by the Center on Budget paper is Senator Chuck Grassley of Iowa, the ranking Republican on the Senate Finance Committee.

Senator Charles Grassley, January 4, 2007:

"It's ridiculous to rely on revenue that was never supposed to be collected in the first place... It's unfair to raise taxes to repeal something with serious unintended consequences like the AMT."

Senator Charles Grassley, March 8, 2001:

"Roughly one in seven taxpayers will come under the shadow of the Alternative Minimum Tax by the end of the decade... That figure will significantly be higher if President Bush's tax plan is adopted, and that is according to the Joint Tax Committee of the Congress."

Senator Charles Grassley, February 28, 2001:

"In addition, President Bush's plan [will] bring millions more Americans into the AMT process; the Joint Tax Committee estimates that the Bush tax plan will nearly double the number of American taxpayers affected by the AMT."


3. "Senate Democrats didn't want to raise taxes on their rich hedge-fund donors." Democrats in the House and Senate wanted to pay for AMT relief, since it clearly constitutes a new tax cut that will increase the federal budget deficit if it is not paid for. It seemed logical to Democratic leaders, and to us, that one way to offset the costs could involve closing a tax loophole for fund managers that should never have existed in the first place. The loophole for "carried interest," a certain type of compensation paid to fund managers who can make hundreds of millions of dollars a year, allows them to pay taxes at a lower rate than middle-income people.

It's true that there was resistance from some quarters within the Democratic caucus in the Senate on the proposal to end this outrageous tax giveaway. But in the end the Democrats were united in their effort to eliminate it. Every Democrat present on December 6 voted to end the loophole (which the WSJ describes as an effort to "raise taxes" on hedge funds). Regardless of how you describe the measure, the truth is that all the Democrats in the Senate voted for it, except for the presidential candidates who were off campaigning, most of whom have specifically, publicly, said that they support closing the loophole.

The bill could not pass because 60 votes are needed to approve legislation in the Senate. The Republicans voted unanimously to kill the bill.

4. We need to continue a tax subsidy for wealthy fund managers because the economy is struggling. No reasonable human being could believe that, to keep the economy running, middle-income people need to subsidize billionaires. But that's what the loophole in question does.

If Congress grants a tax break to a buyout fund manager that saves him $20 million, that's effectively the same thing as giving him a direct subsidy for $20. It costs the federal government the same amount, which really means it costs the rest of the taxpayers -- mostly middle-income people working hard to get by -- the same amount. A tax break targeted to one person means that others who don't get that tax break will have to shoulder a greater proportion of the tax load, and pay higher taxes or face cuts in public services, as a result.

Which gets us to a question conservatives have never adequately addressed: Why should middle-income people subsidize, through the tax code, the compensation paid to these folks who earn millions, hundreds of millions, and even sometimes in excess of a billion dollars?


5. Ending the tax subsidy for wealthy fund managers by closing the loophole is a "new tax" on "risk takers." The conservative spin machine is very keen to describe any effort to close even the most blatant tax loophole as a "new tax." This is particularly crazy in the case of the effort to close the carried interest loophole.

Let's just look at the law as it stands today, with the loophole still in place. If an unmarried receptionist working for a private equity firm earns $42,000 a year, the top federal marginal tax rate that applies to his income is 25 percent. This is on top of the 15.3 percent he pays in payroll taxes on all of his income. The fund managers he works for, however, pay only the 15 percent "capital gains" rate on the "carried interest" they receive as compensation for managing other people's money.

This makes absolutely no sense from a tax policy perspective (see our first and second fact sheets explaining why this compensation cannot be honestly called capital gains) or from the perspective of fairness. The effort to close this loophole was motivated by the desire to have these wealthy fund managers pay taxes under the same rate structure that everyone else is subject to, which hardly constitutes a "new" tax.

Further, the idea that closing the loophole will constitute a new tax on "risk takers" is nonsense. When people from the financial industry came to the Hill to defend their loophole, there was a lot of talk about how the special capital gains rate of 15 percent was needed, even for these folks who don't really have capital gains, to encourage risk.

Why the tax code should be used to encourage people to place their money in risky investments was never clear, but that's largely besides the point since the fund managers we're talking about aren't even investing their own money but are actually managing other people's money.

Anyway, risk has nothing to do with what taxes you pay. There are many types of income that are risky, meaning you don't really know whether they will materialize at all, like performance bonuses, stock options, and royalties, and yet these are all taxed at ordinary income rates rather than the 15 percent rate for capital gains.


So why rehash this all now? Isn't the debate over?

Unfortunately, no, it's not over. Congress enacted an AMT patch just for 2007. The whole thing needs to happen again for 2008. Few of us are in any mood to endure this sorry ordeal again, but it really does not have to be hard, if only the Republicans would display a modicum of rationality.

There are very straightforward ways to pay for the next AMT patch even without closing the loophole for carried interest. In fact, the Democrats did attempt to pass another bill to pay for AMT relief without the carried interest provision, after Republicans in the Senate blocked the first bill. The second bill had excellent provisions to offset the costs of AMT relief, including language that would close a loophole for offshore compensation by wealthy fund managers and language delaying a business tax break that hasn't even taken effect yet.

Incredibly, the Republicans in the Senate blocked this second bill also. We think the bill demonstrates that the tax code is riddled with loopholes that have no justification, and that closing these loopholes is an obvious way to offset the costs of other initiatives (such as AMT relief). The question is: How long can the Republicans in Congress deny the obvious?