Capping a spirited debate, the Democratic-led House voted Friday to shield more than 23 million Americans from a tax hike this year under the alternative minimum tax -- and hit up wealthy managers of private equity firms and hedge funds to make up the difference.
The 216-193 vote, which fell largely along party lines, escalated an emerging political war over tax fairness and the proper treatment of an elite class of investment managers who have benefited from the tax cuts of recent years.
It sparked angry Republican charges that Democrats were rushing to approve ill-advised tax hikes. For their part, Democrats argued with equal vehemence that they were acting responsibly and that if Republicans had their way, they would heap on new debt to cover the relief.
The debate now shifts to the Senate, where the tax increase faces resistance from some Democrats who are reluctant to raise levies on well-heeled donors from the financial world. The Bush administration already has said it would veto the plan.
House Speaker Nancy Pelosi (D-San Francisco) said the vote was a move away from White House fiscal policies, which she described as “tax cuts for the wealthy” financed by the middle class.
“Today we reverse that,” said Pelosi, who added that House members were moving “to plant a flag for fiscal responsibility.”
Republicans fired back that the bill was merely the first step toward major tax increases under the Democrats, who control both houses of Congress.
Rep. Charles B. Rangel (D-N.Y.), chairman of the House Ways and Means Committee, recently introduced a separate, much larger, long-term tax plan that would include an array of increases and reductions.
“I feel like the little boy in Holland sticking his thumb in the dike,” said Rep. Jim McCrery of Louisiana, the 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.”
Congress created the alternative minimum tax in 1969 to guarantee that the nation’s richest households pay at least some tax. But because the provision was not indexed for inflation it has threatened to pinch a growing number of Americans, forcing Congress to make repeated short-term fixes.
Adding pressure to the whole debate, the Internal Revenue Service has warned that if Congress wishes to change the AMT for this year, it must move quickly. In an Oct. 31 letter to Congress, acting IRS Commissioner Linda E. Stiff said that if lawmakers waited until December to act, the IRS might have to delay processing 50 million returns and $75 billion in refunds.
“We must take action to fix the AMT before Thanksgiving -- without raising taxes,” Senate Republican leader Mitch McConnell of Kentucky said in a statement shortly after the House vote. “Middle-class taxpayers can’t afford to wait.”
Though members of both parties overwhelmingly dislike the old provision, they have a sharp dispute on how to defuse it. House Democrats insisted Friday that the only responsible course was to come up with other ways to raise the revenue.
Democrats also took strong exception to the idea that targeting what they view as loopholes enjoyed by an elite group could be labeled a tax hike.
“How can you possibly call it a tax increase when we’re trying to bring some degree of equity to the system?” asked Rangel, the main author of the tax plan.
At a news conference after the vote, Rangel said, “Everyone wants to give relief, but not everyone wants to pay for it.”
Without an AMT fix, a tax hike potentially looms over families who earn $75,000 or even less, although the bigger effect will be felt by more affluent households.
The bill approved Friday would shelter millions of families from the AMT while making up the lost revenue by requiring managers of investment partnerships such as private equity firms to pay ordinary income tax rates on their earnings. Currently, many pay at the lower capital gains rate. In many cases, the stricter treatment of income known as carried interest would raise the tax rate for well-heeled fund managers to 35% from 15%.
Private equity firms specialize in buying out corporations or units within companies, often taking them private with the intention of later reselling them at a profit.
The provision would apply to other investment partnerships, including those in venture capital and real estate, but the big private equity firms that have risen to prominence in recent years are the main target.
On Friday, a private equity trade group tried to describe the relatively close House vote in optimistic terms, saying it reflected widespread concern in Congress.
“With this vote, many lawmakers indicated that they are worried that the legislation could put at risk the economic benefits delivered by private equity and other investment firms that drive innovation, create jobs and strengthen American companies in the face of increasing global competition,” said Douglas Lowenstein, president of the Private Equity Council.
In a separate statement, the National Venture Capital Assn. warned that such a tax hike could hinder investment in a variety of industries, including biotechnology and energy, posing “a long-term negative impact on U.S. job growth and innovation.”