Confronting the Senate and White House, House Democrats for a second time passed tax relief for 21 million people, going after companies and hedge fund managers that shelter money offshore. The vote Wednesday was a near party-line 226-193.
The White House responded with a veto threat and the Senate's top Republican said the House approach to fixing the alternative minimum tax was unacceptable.
"The Senate will not pass a short-term fix for some, if it includes a permanent massive tax hike for others," said Sen. Mitch McConnell, R-Ky.
But House Speaker Nancy Pelosi, D-Calif., said it was a clear choice when millions of families get tax relief while 5,000 to 10,000 wealthy people pay the tab. Republicans, she said, would "increase the national debt in order to give comfort to people who are evading their taxes by going offshore to the tune of billions of dollars."
Fiscally conservative Democrats known as Blue Dogs have pushed to rein in that tax without adding to the federal deficit. "We see this as the defining issue for our party," said one of the group's leaders, Rep. Mike Ross, D-Ark.
The House last month passed legislation providing one-year relief for about 21 million -- some put the number at 23 million -- facing an AMT bill averaging about $2,000. The measure also extending other tax breaks and included $80 billion in new tax revenues, affecting investment fund managers and others.
Senate Republicans last week blocked consideration of the House bill, forcing the Senate to go with a bill that provides AMT relief without revenue raisers to offset the $50 billion cost.
Wednesday's vote, said House Majority Leader Steny Hoyer, D-Md., will "give the Senate a second opportunity to pursue fiscal responsibility."
The impasse increases the possibility that the tax will affect 25 million people in 2007, compared with 4 million in 2006. Both parties say that cannot be allowed to happen.
The dispute will have more immediate repercussions. The Internal Revenue Service has indicated that it may not be able to begin processing 2007 returns next month if the issue is unresolved. That would delay refund checks for hundreds of thousands of early filers.
The AMT was created in 1969 to make sure that some 155 very rich people did not totally avoid paying taxes. It provides alternative rules for calculating income tax allowing for fewer deductions. It never was adjusted for inflation. So every year, more people become subject to the AMT. Congress in recent years has resorted to one-year fixes to protect upper-middle-class taxpayers, many in the $75,000 to $200,000 income level range, from bigger tax burdens.
House Democrats, on the first day of this session, passed a rule requiring that tax cuts or mandatory spending increases be offset so as not to add to the deficit. They say the AMT fix must be paid for.
Republicans contend that the Democrats are raising taxes to prevent a tax increase from the AMT that is not going to happen.
"The administration is extremely disappointed," the White House said in its latest veto message, that the House is demanding tax increases "as the price for protecting 25 million taxpayers from an unintended, unexpected and unwelcome tax increase averaging $2,000."
Rep. Charles Rangel, chairman of the tax-writing Ways and Means Committee, altered the first House bill with tax revenue sources he said might be more palatable to Republicans. The first bill imposed higher taxes on the "carried interest" of investment managers, venture capitalists and some real estate investors, which critics said could impede investment initiatives.
The new bill has two main sources of new revenue:
--Current law allows companies and individuals to defer taxes on compensation paid by offshore entities in tax haven countries until that compensation is received. The bill would require the timely paying of taxes on deferred compensation in these circumstances. Hedge fund managers and others use this deferred compensation provision to lower their tax burden.
"No one has the guts to defend the offshore deferred compensation," said Rangel, D-N.Y. "We know that it is indecent and immoral."
--The bill delays for eight years the planned 2009 implementation of a law allowing multinational corporations greater freedom in allocating interest expenses between U.S. and foreign sources for purposes of determining foreign tax credits.
The cost of the new bill is about $55.7 billion, down from more than $80 billion in the first bill because it leaves out the extension of certain tax credits for teachers, research and development and state sales taxes.
The bill does increase the eligibility for the refundable child tax credit in 2000, at a cost of almost $3 billion over 10 years.