Environmentalists have their eyes on the Senate, where Majority Leader Harry Reid has given several committees a September 28 deadline to mark up climate change legislation. The legislation is expected to include a "cap-and-trade" program, in which companies would need to have allowances to emit greenhouse gases, and the amount of allowances would be capped at a level that would decline for several years.

The House of Representatives passed its version (H.R. 2454, the American Clean Energy and Security Act of 2009) in June. It's clear that America needs to act to reduce the greenhouse gases that contribute to climate change. But it's equally clear that the Senate could do better than the House did in addressing this problem.

President Obama proposed in his first budget that Congress create a cap-and-trade system in which all of the emissions allowances are auctioned off to companies rather than given away for free. The overall amount of allowances would be capped and reduced each year. The revenue raised could be largely used, the President reasoned, for a refundable tax credit that would offset the impact of the resulting higher energy costs for low- and middle-income families.

The House cap-and-trade bill only auctions off 15 percent of the allowances, and the revenue raised would help offset the costs for the poorest fifth of families. So 85 percent of the allowances would not be auctioned off, but neither would they be doled out for free to corporations (not all of them anyway). There would be strings attached for some. For example, local utility companies would initially get almost half of the allowances, but in return they would be required to pass savings onto consumers. Unfortunately, there are many reasons why this is an inefficient way to protect consumers.

The Senate might repeat the House's mistakes. One of the Senate committees with partial jurisdiction over the legislation will be the Finance Committee, whose chairman (Max Baucus of Montana) recently told Congressional Quarterly that the Senate would probably not allocate the emissions allowances all that differently than the House bill does.

The increased costs that middle-income families would see if the House bill becomes law are not gigantic ($235 a year according to the Congressional Budget Office). But Congress needs to decide whether the increased prices paid for energy should go largely towards corporate profits (which seems to be the likely result of the House-passed bill) or be redirected back to consumers.

The Senate could accomplish the latter by auctioning off more than 15 percent of the allowances and using the revenue to offset the increased energy costs more effectively for both low- and middle-income families. The Center on Budget and Policy Priorities points out that refundable tax credits, combined with more use of EBT cards, would be an effective way to deliver the necessary energy refund to the vast majority of low- and middle-income families.

The Senate might not just repeat the House's mistakes. They might even add a few of their own. Baucus told the Daily Tax Report that “Congress could use the money from auctioning allowances to cut taxes: by cutting marginal rates, by cutting capital gains rates, by cutting payroll taxes. Or we could do all of the above.”

To take just one of these ridiculous ideas, the preferential rates that already exist for capital gains and dividends already cost us around $100 billion a year and the vast majority of the benefits go to the richest one percent of taxpayers. Let's hope Senator Baucus sees that relief for consumers is more important than showering more special breaks on wealthy investors.

Citizens for Tax Justice (CTJ) has joined forces with a broad coalition of organizations called Rebuild and Renew America Now (RRAN) to promote a simple message: Congress has a whole lot of options to raise revenue to pay for health care reform and other initiatives without unfairly impacting low- or middle-income people and without harming the economy.

These progressive revenue options include both the tax changes included in President Obama's fiscal year 2010 budget proposals as well as additional options formulated in a recent report by CTJ and endorsed by Health Care for America Now (HCAN) and the Service Employees International Union (SEIU). (See CTJ's report on the President's tax proposals and CTJ's report on additional revenue options to fund health care reform.)

RRAN is a coalition that engaged in education, communications and lobbying efforts in support of the President's budget and other progressive initiatives earlier this year and has mobilized advocates and activists all over the country. Many of the organizations involved are usually focused on particular public services or progressive reforms, but have realized that all public services and reforms are in danger if Congress can't bring itself to raise the revenue needed to pay for them.

RRAN has invited organizations (both national organizations and state organizations) to sign onto its two-page statement of principles for this new campaign for progressive revenue options. Signing does not commit an organization to do anything (although all are also encouraged to become active in RRAN's activities) but simply states support for efforts to pay for initiatives in progressive ways. Anyone who is authorized to sign on behalf of an organization can visit the website of the Coalition on Human Needs (CHN) or simply click here.

The statement lists three broad principles to guide Congress's efforts to find revenue:

1. Adequacy. The federal tax system should raise sufficient revenue over time to meet our shared priorities and invest in our common future.

2. Fairness. Tax preferences that overwhelmingly benefit the wealthy and corporations should be eliminated, and individuals and businesses should contribute their fair share of taxes, based on ability to pay.

3. Responsibility. We should not saddle future generations with unsustainable levels of debt.

The statement also lists examples of the kinds of tax policies RRAN supports:

• raising revenues from upper-income households;
• assessing a significant tax on large estates;
• reducing abuses among corporations and individuals who shelter income in offshore tax evasion or avoidance schemes;
• closing financial industry, oil and gas, and other inefficient corporate loopholes; and
• reducing tax preferences for unearned as opposed to earned income.

For more information in the coming days, visit RRAN's website: www.rebuildandrenew.org

On May 11, the Treasury Department released its "Green Book" containing new details of the tax changes included in the President's fiscal year 2010 budget proposal. In addition to extending the Bush tax cuts for all but the richest Americans and making permanent many of the tax cuts in the recently enacted economic recovery act, the President would also make many changes that would raise revenue by closing loopholes, blocking tax avoidance schemes and making the tax code more progressive.

A new report from Citizens for Tax Justice examines and describes the significant revenue-raising provisions that are sure to be debated fiercely in the months to come.

Read the report.

This week, Citizens for Tax Justice updated its recent report on the tax proposals in the President's budget outline to include estimates of the proposals' impacts on different income groups in every state. The new state figures examine the proposed cuts compared to current law and also compared to the baseline that the Obama administration uses in presenting its budget figures. The figures show that, whichever baseline is used, the vast majority of families in every state will get a significant tax break.

Read the report. (State-by-state figures are in the final appendix.

On February 26, President Obama sent to Congress the blueprint for what could be one of the most progressive federal budgets in generations. The budget calls for national health care reform, expanded education funding, a program to reduce global warming, and several improvements in human needs programs. As a new report from Citizens for Tax Justice explains, it would make the tax code considerably more progressive, and close a number of egregious tax loopholes.

There is, however, a flaw in the budget proposal: It does not raise enough revenue to pay for public services. Instead, its net effect is to cut taxes dramatically.

Opponents of the President have attempted to argue that the budget proposal calls for tax increases that could sink the economy, but this complaint is plainly unfounded. President Bush and his allies in Congress were adamant that lower taxes would lead to an explosion of prosperity, and they enacted tax cuts in 2001, 2002, 2003, 2004 and 2006. Some allies of the former President argue that Congress is now insufficiently focused on tax cuts, but this view seems bizarre and incredible given the sad economic facts all around us.

Indeed, one might reasonably conclude that we could safely allow most of the Bush tax cuts to expire at the end of 2010, as they are scheduled to under current law, without any concern about how this will impact the economy. But President Obama actually proposes to keep most of the Bush tax cuts. Obama's largest proposed tax cut is to re-enact 80 percent of the Bush tax cuts that are scheduled to expire at the end of 2010. Most of this reflects re-enacting the Bush income tax cuts for married couples with incomes below $250,000 and others with incomes below $200,000 (or put another way, for about 98 percent of taxpayers), and permanently reducing the Alternative Minimum Tax (AMT). In addition, Obama proposes to re-enact close to half of the Bush estate tax cut.

On top of re-enacting most of the Bush tax cuts, the Obama budget includes a number of additional tax cuts for families and individuals. (These would be extensions of temporary tax cuts included in the recently passed stimulus law.) It also proposes some questionable business tax cuts.

Partially offsetting its tax-cut proposals, the Obama budget proposes some significant revenue-raising provisions. These include a cap-and-trade program to reduce carbon emissions, a limit on the benefits of itemized deductions for high-bracket taxpayers, and a number of corporate and high-income loophole-closing measures.

Read the Report

It was bound to happen. In response to the crisis on Wall Street, some members of the Republican Study Committee in the House of Representatives proposed a familiar solution: tax cuts. In particular, they proposed a suspension of capital gains taxes for both individuals and corporations for two years, after which capital gains would be reduced from their current levels because "assets would be indexed permanently for any inflationary gains." The article from BNA that landed in our inboxes actually said that they proposed this measure "as a way to coax capital back into sluggish lending markets and offset the cost of a proposed government bailout of the U.S. financial system."

If suspending a tax altogether (that is, lowering its rate to zero) can increase revenue and offset the cost of anything, then supply-side economics may have risen above the laws of the known universe entirely into some new, unknown realm beyond our comprehension.

It would be comforting to believe that this thinking is confined to some small fringe group of lawmakers. Actually, the Republican presidential nominee is not far behind. John McCain recently proposed to temporarily slash the capital gains tax rate to a super-low 7.5 percent. (See CTJ's recent paper, "McCain's Proposal to Expand the Loophole for Capital Gains Would Be Unfair and Counterproductive.")

This seems like the ideal time to ask what exactly supply-side tax cuts for investment have accomplished. Bush expanded the tax subsidy for capital gains (lowering the special capital gains tax rate from 20 percent to 15 percent) and created a new one for dividends (which was taxed like any other income but is now taxed at a top rate of 15 percent). We do not know that the Bush tax cuts for investment actually contributed to the financial collapse. But the notion that they contributed to excessively risky investments and helped fuel the calamity is at least as reasonable as the notion that they helped grow the economy, considering our current economic situation.

There are several conceptual reasons why these tax subsidies for investment are simply not sensible policy. For one, it offends most people's idea of basic fairness that someone who earns $42,000 from work can be taxed at a higher rate than someone who receives the same amount of income by collecting dividend checks. Why someone like Paris Hilton, who probably lives off her wealth, should be taxed at a lower rate than someone who actually works has never been adequately explained by the proponents of these tax cuts.

But in addition to that, the subsidy leads to all sorts of shifty tax dodging behavior that makes the economy less efficient, since money is invested in certain activities or properties merely to get a tax break, rather than because it's the most efficient use of capital.

Supply-siders sometimes have their very best luck in convincing the naive to adopt their views when they're talking about the capital gains tax. Part of the reason for this is that capital gains tax revenues fluctuate wildly with economic cycles, rocketing upwards during the good times and crashing during recessions. The charts illustrating capital gains tax revenue have lines that look like rollercoasters, and supply-siders often confuse the unwary into believing that some cut in the capital gains tax rate caused one of the upswings.

For example, as a paper published earlier this year by CTJ explains, capital gains tax revenue crashed during the recession in 2001. This revenue of course climbed back up from that low point, as we would expect. But because this natural upswing coincided with Bush's cut in the capital gains rate from 20 percent to 15 percent, supply-siders (like the editorial board of the Wall Street Journal) argue that the Bush tax cut caused this revenue to increase. What they leave out of the story is the fact that capital gains tax revenue was higher at the end of the Clinton years, when the capital gains rate was higher.

The argument over revenues can seem like an arcane debate full of jargon and charts and tables, but the fairness problem posed by the loopholes for investment income is readily apparent. These loopholes direct a huge amount of money to the rich. Earlier this year, CTJ released a report finding that 70 percent of the benefits of the capital gains and dividends loopholes will go to the richest 1 percent of taxpayers in 2009. Of course recent events on Wall Street will lower the capital gains reported in 2009, but there is no particular reason why the distribution of the benefits from these loopholes would be any different. Unlike the supply-siders, we will resist the temptation to say that the coming change in capital gains tax revenue is a direct result of the Bush administration's policies. (Although the case could be made...)

The U.S. House of Representatives voted mostly along party-lines Wednesday to approve H.R. 6275, which would extend relief from the Alternative Minimum Tax (AMT) for another year and offset the costs mostly by closing tax loopholes.

As explained in last week's report from Citizens for Tax Justice, it is only fair that the cost of AMT relief be offset by closing loopholes that benefit the wealthiest Americans. One of these is the much-hated loophole for "carried interest," a form of compensation paid to private equity fund managers in return for investing other people's money. Most of us who earn an income from work are subject to federal income taxes at progressive rates, starting at 10 percent and going up to 35 percent for the very wealthiest. Private equity fund managers are at the top of this wealthy group, but nevertheless pay only 15 percent -- the special low capital gains tax rate -- on their carried interest. Closing this loophole makes up about half of the $61 billion needed to offset the cost of extending AMT relief for a year.

Republican leaders in the Senate will try to block consideration of this bill, arguing that any legislation extending a tax provision that is currently in effect should not be paid for. The absurd implication of this argument is that Congress should not have to pay for tax cuts if they start out as one-year or two-year provisions and are then extended past their original expiration date. It's also a demand for an increase in the budget deficit, which seems to no longer be a concern of conservative lawmakers.

The House Ways and Means Committee approved a bill (H.R. 6275) this week that would temporarily prevent the Alternative Minimum Tax (AMT) from expanding its reach to families who are mostly well-off, but not as wealthy as those the tax was originally intended to target. Almost all lawmakers agree that this step should be taken. But President Bush and Republican leaders oppose the Ways and Means bill because it offsets the cost of AMT relief with revenue-raising provisions in order to avoid an increase in the budget deficit.

The AMT was created to ensure that wealthy Americans pay at least some federal income taxes no matter how skillful they are at finding loopholes. It is reasonable that Congress wants to prevent it from affecting more families, but as argued in a new report from CTJ, there is no reason why the deficit should be increased to provide tax relief for those who are relatively well-off. The Ways and Means bill would offset the cost of AMT relief mainly by closing unwarranted tax loopholes, which will in turn make the tax code fairer and more economically efficient.

The House Ways and Means Committee approved a bill (H.R. 6049) on Thursday that includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well renewable energy tax incentives and a few new tax cuts. Unlike similar bills passed during the Bush years, this extenders package includes revenue-raising provisions to offset the costs.

Republicans Demand Increase in the Budget Deficit

Ranking member Jim McCrery (R-LA) and other Republicans on the committee argued that Congress should not have to offset the costs of extending tax cuts because these extensions amount to a continuation of current policy. But the tax cuts in question were never enacted as permanent tax cuts, so Congress never budgeted for the costs that they would present in future years if they were permanent (meaning the revenue "baseline" used by the Congressional Budget Office assumes that these tax breaks will expire). McCrery's logic implies that Congress should be able to enact any tax cut for a single year and then at the end of that year make it permanent without offsetting the costs.

The Tax Cuts in the Bill

The renewable energy tax incentives cost a total of $17 billion and the largest is the 3-year extension of the "section 45 tax credit" for the production of energy from renewable resources, at a cost of $7 billion.

The new tax cuts cost a total of $10 billion, and include a change in the AMT related to the treatment of stock options, a deduction for property taxes for non-itemizers which was also included in the housing legislation the House passed last week, and an expansion in eligibility for the Child Tax Credit for low-income people. The change in the credit is the biggest of this group, with a cost of about $3 billion.

First enacted during the Clinton administration, the Child Tax Credit was significantly expanded as part of the Bush tax cuts. It is now worth up to $1,000 for each child under age 17. But many low-income families do not benefit at all from the child credit, and many others get only partial credits. That's because the credit is unavailable to families with earnings below $12,050 (indexed for inflation), and the credit is limited to 15 percent of earnings above that amount. In other words, a working family making less than $12,050 this year is too poor to get any child credit. The bill would lower the child credit's earnings threshold from the current $11,750 to $8,500 and would no longer increase the threshold every year for inflation. The Center on Budget and Policy Priorities points out that 13 million children would be helped by this provision and describes some of the characteristics of the families likely to be affected.

The one-year "extenders" cost a total of $27 billion and include extensions of several tax breaks that have been criticized in the past by Citizens for Tax Justice, like the research and development credit, the deduction for state and local sales taxes, and the above-the-line deduction for tuition.

Despite these provisions, this bill is an important step forward because it improves the Child Tax Credit and maintains lawmakers' commitment to the pay-as-you-go (PAYGO) rules that require new tax cuts and entitlement spending to be paid for.

Revenue-Raising Provisions to Comply with PAYGO

The revenue-raising provisions are borrowed from a bill that the House approved last year. One would delay a law that has not even gone into effect yet and which will make it easier for multinational corporations to take deductions for interest payments that should really be considered expenses of foreign operations and therefore not deductible. Implementation of the new "worldwide allocation" rules would be delayed until 2019, raising about $30 billion over ten years.

The second revenue-raising provision would crack down on the use of offshore schemes that private equity fund managers use to avoid taxes on deferred compensation.

The tax code allows employees to defer paying taxes on money that they or their employers put into "qualified" retirement savings plans, such as 401(k)'s, until they take money out during retirement. But contributions to such "qualified" plans are limited, to no more than $30,000 a year depending on the type of plan. That's the sort of plan most Americans can get... if they're lucky.

Highly-paid corporate executives, however, often get to go a giant step farther. They can set up "non-qualified" deferred compensation plans, which are not taxable to the executives until they take the money out, but which are not deductible by companies until then either. Currently, there is no limit on how much money executives can defer taxes on through these plans. But the corporations who pay them also have to defer the deduction they take for whatever they pay into the deferred compensation plan, so in theory there is only a small loss to the Treasury (and to the rest of the taxpayers).

But private equity fund managers have managed to create an approach to deferred compensation that goes even farther, and does impose a substantial cost on the rest of the taxpayers. Private equity fund managers often have an "unqualified" plan into which is paid an unlimited amount of deferred compensation. But they arrange the payments to be technically made by an offshore corporation in a tax haven country that has no corporate tax, or a very low one, so the loss of the deduction is not an issue. Of course, this is done with paper transactions. No one is actually working in the tax haven country, so this is really just a scheme to increase the amount of deferred compensation that can be paid to these already highly-compensated fund managers without being taxed right away.

The bill approved by the Ways and Means Committee Thursday would close this loophole, raising about $24 billion over ten years.

These provisions are good policy based on fairness grounds alone. The need to raise revenue to prevent an increase in the budget deficit only makes them more important.

It is unclear whether these offsets will be included in the Senate version of the bill, which the Senate Finance Committee will likely mark up after the Memorial Day recess.

An online video linked with a petition to the presidential candidates has generated nearly 30,000 signatures in support of closing the loopholes used by the buyout fund managers ("private equity" fund managers) to generate billions without paying their fair share of taxes. The video is part of the "War on Greed" film series that Robert Greenwald has created and which takes a comical yet serious look at the greed of private equity titans like Henry Kravis of Kohlberg Kravis Roberts (KKR). The most recent video explains the tax loopholes used by the industry, including the loophole for "carried interest," which is basically compensation paid to fund managers for managing other people's money. Although the video does not use the term "carried interest," it does explain that these super-wealthy fund managers are allowed to pay taxes on their compensation at the special low 15 percent rate reserved for capital gains.

Many were disappointed last year when the Senate failed to approve a House-passed bill that would have closed the carried interest loophole and clamp down on the fund managers' use of offshore tax avoidance schemes. Hundreds of organizations had publicly endorsed the effort to close the carried interest loophole.

For its part, the private equity industry/buyout industry seems to know that the loopholes it enjoys still infuriate some members of Congress and the public. KKR just hired Ken Mehlman, the former chairman of the Republican National Committee, to run its public affairs department, demonstrating real concern that Congress may move to check the unfair advantages the industry enjoys.

ABC news anchor Charlie Gibson perpetuated a myth about taxes at the Democratic presidential debate on Wednesday night. Gibson said of the capital gains tax that "in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down." He asked Senator Obama, who has signaled that he would raise the capital gains tax from its current level of 15 percent to 28 percent, why he would bother doing this if it would actually reduce revenues.

There is just one problem. What Charlie Gibson said is not true. Revenues from capital gains do not rise when the tax is cut. They rise when the economy is booming and they collapse when the economy tanks. In fact, revenue from capital gains taxes is currently well below the peak it reached during the Clinton era ¢Â€Â” when taxes were higher.

A small group of ideologues associated with "supply-side economics" believes that tax cuts can actually increase revenues. While this notion is rejected by most mainstream economists and sounds ludicrous to the average person, members of the media and Congress seem unusually susceptible to being hoodwinked into believing it. Their general idea is that if we lower capital gains taxes, there will be more capital gains realizations (meaning more people sell their property that has gone up in value) because the tax on that profit has been cut, and this will lead to revenue increasing overall.

Even if there are more realizations as a result of a capital gains tax cut, the resulting revenue will be nowhere near enough to make the tax cut budget-neutral, much less revenue-enhancing.

The ups and downs in revenue collected by the capital gains tax seem to have more to do with what's happening in the broader economy than with tax policy. In the early and mid-1990s, when the top capital gains tax rate was 28 percent, the revenues collected by the tax shot through the roof. They continued to climb after the rate was lowered to 20 percent in 1997, but this looks more like the continuation of a preexisting trend linked to economic prosperity rather than a response to the change in the rate. Then in 2001 and 2002 the revenues collected by this tax fell precipitously. This was not following any change in tax policy at all, but clearly linked to the bursting of the dot.com bubble and its ramifications on the stock market.

Capital gains tax revenue did increase after 2003, when the rate was cut again to 15 percent, but we would expect the revenue to rise from the low point of the recession, regardless of what changes were made to the tax code. More importantly, the revenue obviously has not reached the high level of the Clinton years when the rate was higher. Measured as a percentage of GDP, the capital gains tax will probably collect only half as much revenue this year as it did in 2000, when the rate was higher.

Can support for the supply-siders' argument be found if one looks further back in time? No. Charlie Gibson seems to think that capital gains tax revenue fell when the rate was raised as part of the 1986 Tax Reform Act that was signed by President Reagan. The reality is that capital gains realizations surged in anticipation of the rate increase (which took effect in 1987). In other words, an increase in the rate actually increased revenues, albeit temporarily. After that, with fewer gains to realize, realizations predictably declined, and eventually returned to their normal level -- until the Clinton adminstration, when the stock market went up so much that realizations boomed.

When Gibson pressed Senator Obama a second time, insisting that cutting the capital gains tax rate would raise revenue, Obama replied, "Well, that might happen or it might not. It depends on what's happening on Wall Street and how business is going." Obama also brought up the issue of fairness in the tax code, and the fact that wealthy people with capital gains can pay less in taxes than middle-class Americans, which is an unacceptable feature of our system.

Senator Clinton, however, stated, "wouldn't raise [the capital gains tax rate] above the 20 percent if I raised it at all. I would not raise it above what it was during the Clinton administration." This is an unfortunate response. The rate was higher than 20 percent during most of the Clinton administration and the economy thrived and revenues poured in. And, since the revenue "baseline" used by Congress already assumes that the rate will revert to 20 percent when the Bush tax cuts expire at the end of 2010, no "new" revenue will be raised to pay for the candidates' health care proposals or other new initiatives by simply letting the rate revert to 20 percent.

Pete Peterson, a co-founder of the Blackstone Group, is retiring from the private equity business and unveiling a new foundation bearing his name. The Peterson Foundation, which will be well-funded and staffed by luminaries like GAO director David Walker and former senator Sam Nunn, will work to promote the idea that entitlement programs cause our nation's fiscal problems, and will address other issues like nuclear proliferation.

As the New York Times reports, there is one problem with Peterson's scolding Americans for enjoying Social Security and Medicare: Peterson himself sees no problem in enjoying government largesse that is provided through the tax code. He has benefited enormously from the tax loophole for "carried interest," which allows buyout fund managers to enjoy the low 15 percent capital gains rate for compensation they receive for managing other people's money. As CTJ has argued in many places, this loophole essentially subsidizes the incomes of millionaires and billionaires through the tax code.

But this type of contradiction is nothing new for Peterson. Back in 1994, CTJ director Robert McIntyre wrote an article in the American Prospect called "False Messiah." He pointed out that the ideas Peterson promoted back then basically came down to (A) slashing entitlement programs that help people to reach and stay in the middle-class and (B) replacing the progressive income tax with a consumption tax that would be a massive boon to the wealthy while increasing the tax burden on everyone else. A consumption tax would make income from wealth and savings entirely tax-free. That's the sort of income rich families have a lot of and poor families have none of.

Nonetheless, Peterson had a remarkable ability even then to present his ideas as advice that would save the middle-class. It will be worth watching his new foundation to see whose interests it really serves.

At the end of last year, Republicans in the Senate blocked attempts by Democrats to close tax loopholes and reduce offshore tax avoidance to pay for relief from the Alternative Minimum Tax. The White House had sent signals that the President would veto the Democratic bill if passed. Some Democrats in Congress are adamant that the debacle not be repeated, while some Republicans seem equally committed to increasing the federal budget deficit.

The alternative minimum tax (AMT) was originally created in the late 1960s to ensure that super-wealthy Americans pay at least some federal income taxes no matter how skillful they are at using tax loopholes. In recent years, its reach has expanded because Congress has not permanently indexed for inflation the exemptions that keep most of us from paying the AMT and, even more importantly, because the Bush tax cuts reduced ordinary income taxes without permanently changing the AMT. As more families see their ordinary income tax liability fall below their liability under the AMT, that means the AMT becomes relevant to the lives of more and more taxpayers.

Instead of permanently indexing the exemptions for inflation, Congress has been enacting "patches" to the AMT each year, measures that temporarily increase the exemptions to keep the AMT under control. A permanent fix was not included in the tax cut bills enacted when Republicans controlled Congress because that would have added to the official costs of those bills. Since the Democrats took control of Congress, they've attempted to reconcile AMT reform with their goal of avoiding any legislation that increases the federal budget deficit. Last year, Democrats in the House passed a one-year patch that would have been paid for by closing the loophole for carried interest paid to private equity fund managers and by cracking down on their use of offshore tax shelters. The administration called these provisions "tax increases" as did the Republicans in the Senate, who voted en masse to block the bill. Democratic leaders were then forced to pass an AMT patch that was not paid for, increasing the deficit by $50 billion.

This year there has been some discussion of using special budget procedures to make it easier to pass a bill that pays for AMT relief. If the budget resolution passed by Congress provides "reconciliation" instructions to change taxes or mandatory spending, a bill can be introduced later to accomplish that goal and can pass the Senate with just a bare majority of votes rather than the usual 60. House Majority Leader Steny Hoyer (D-MD) told BNA recently that he would support using the reconciliation process for an AMT patch, but some Democrats in the Senate think that might make it more difficult to pass a budget this year.

Congress is hurtling toward adjournment after resolving a series of stand-offs between Democrats and Republicans and between Congress and the President. Republicans in the Senate twice successfully blocked attempts to pay for AMT relief, while the President twice successfully vetoed expanded health insurance for children. Meanwhile, an attempt to shift tax breaks from "dirty" energy to "clean" energy failed by one vote, although Congress did enact some important non-tax-related energy provisions.

Alternative Minimum Tax: Congress Passes "Patch" But Doesn't Pay for It

On Wednesday, the House of Representatives approved a Senate-passed bill to "patch" the Alternative Minimum Tax (AMT). The "patch" is basically a one-year measure that extends through 2007 the exemptions that keep most of us from paying the AMT, which is a sort of backstop tax that ensures the wealthy pay at least some minimum amount of income tax regardless of how many deductions and credits they claim.

The AMT was originally intended to target only the very wealthy. Over time its reach expanded because the exemptions were never indexed to inflation, and the Bush tax cuts caused the AMT to expand much more. Since the AMT is in fact an alternative tax, if regular income taxes are cut without corresponding cuts in the AMT, more people pay the AMT.

In 2001, the President chose not to include corresponding adjustments to the AMT in his tax cut plan, although he surely assumed Congress would prevent the AMT from taking back a large portion of the tax cuts for moderately well-off families. And that's exactly what Congress has done, albeit through temporary patches passed periodically rather than a permanent fix. The cost of these patches was never included in the cost estimates of the Bush tax cuts that were presented to the public when they were being debated, effectively masking the true costs of those cuts.

This obviated the need for even a pretense of offsetting those additional costs. Today Congress is still not offsetting those costs.

Republicans Block Two Fiscally Responsible AMT Bills

The Republicans in the Senate were able to block two attempts to pay for the AMT patch in the last two weeks, both of them approved by Democratic majorities in the House. The first bill (H.R. 3996) would have replaced the revenue, partially by closing the loophole for "carried interest" paid to managers of buyout funds and other types of funds which allows these super-wealthy individuals to pay taxes at a lower rate than middle-income people.

Every Democrat in the Senate voted to act on this version (minus the Presidential candidates who almost certainly would have voted for it if they had been present) and every Republican who voted voted against. In the Senate, 60 votes are required to consider most legislation, so the bill could not be acted on despite the support of every member of the majority party. Senate Democrats were then forced to approve the $50 billion patch without any offsets, violating their pledge to adhere to newly reinstated pay-as-you-go (PAYGO) rules.

The House passed another version of the AMT patch with offsets (H.R. 4351), this time focusing more on cracking down on offshore tax avoidance by fund managers. The pattern repeated itself in the Senate, as the Republican minority was able to block the bill, choosing to protect wealthy tax evaders who use offshore shell companies rather than paying for AMT relief.

On Wednesday the House of Representatives voted to approve the Senate-passed AMT patch without offsets. Ways and Means Chairman Charlie Rangel said that it would be pointless to oppose AMT relief since it is very unlikely that the public would understand why a tax no one had ever heard of was suddenly affecting some families who were fairly well-off but not rich.

Media Neglects Role of GOP Obstruction

The press has focused unfairly on the "failures" of the Democrats to meet all of their goals.

This is unfair partly because the goals were extremely ambitious in retrospect. Democrats promised to provide $50 billion worth of AMT relief and also promised not to increase the deficit. This was while the Republicans in Congress and the President took an extreme stance on tax matters. Closing any tax loophole, even the most blatantly unfair tax loophole, represents a tax increase that will wreck the economy according to the President and his allies in Congress. They even equate stopping offshore tax evasion with tax increases that will discourage investment. In hindsight, it's clear that lawmakers taking this extremist position on taxes were ready to follow their President off a fiscal cliff by obstructing common sense measures.

It's also unfair to say the Democrats "caved" on PAYGO, as some media accounts have it, given that every Democrat in the Senate voted to pay for the AMT relief as did all-Democratic majorities in the House. Thanks to the 60-vote threshold to pass legislation in the Senate, the minority party was able to block the fiscally responsible legislation. Why the press has largely failed to note that Republican obstruction is the root cause of the AMT-PAYGO debacle is entirely unclear.

On Wednesday, December 12, the U.S. House of Representatives passed a bill, H.R. 4351, that would extend the exemptions that keep the Alternative Minimum Tax (AMT) from affecting most Americans and would replace the revenue the AMT is projected to otherwise collect. One provision would help replace the AMT revenue by restricting offshore tax avoidance schemes by wealthy individuals. Another provision would delay the implementation of an unnecessary tax break for multinational businesses which hasn't even gone into effect yet.

Dropped from this bill is a provision that would end the tax subsidy for "carried interest," a type of compensation paid to wealthy fund managers. Carried interest is currently taxed at a special, low 15 percent rate, lower than the tax rate paid by many middle-class families. Last week, Republicans in the Senate blocked a similar House-passed bill that would have ended this tax subsidy because they were committed to defending this break for millionaire fund managers. So, in the spirit of compromise, the House passed H.R. 4351 on Wednesday without the carried interest provision.

Incredibly, Republican leaders in the Senate are insisting that they will block this new bill even though it lacks the "controversial" carried interest provision. They seem to believe that H.R. 4351 includes "tax increases" that will hurt the economy. By this logic, the economy literally depends on the ability of rich individuals to avoid taxes by using offshore shell companies. Also by this logic, the economy depends on a tax break for multinational companies that has not even gone into effect yet.

Meanwhile, 17 Democratic members of the House, mostly members of the Progressive Caucus, signed a letter sent to House Speak Nancy Pelosi demanding that the cost of AMT relief be fully offset. The letter argues, quoting Citizens for Tax Justice, that "AMT relief, by itself, would not be particularly progressive ... Most of the benefits would go to the richest fifth of taxpayers, and if it's deficit financed, the cost could be borne in the future by middle-income Americans in the form of cuts in public services or higher taxes. But AMT relief can be progressive if the costs are offset with revenue-raising provisions that target the very wealthiest Americans, those who have benefited the most from the Bush tax cuts." The leadership of the 48-member Blue Dog Coalition of Democrats in the House also has stated repeatedly that any AMT relief that is not paid for will be unacceptable.

For more information about the House bill and how it offsets the cost of AMT relief, see the new short paper from Citizens for Tax Justice describing the legislation.