Democrats look to shift a tax back to the rich

WASHINGTON -- Democrats in Congress are preparing a long-awaited plan that seeks to deliver a major tax break to millions of middle-class families -- paid for by raising taxes on upper-income earners.

The centerpiece of the proposal, now being crafted by key Democratic lawmakers, would dramatically limit the unpopular Alternative Minimum Tax, a provision that was designed to prevent rich taxpayers from ducking taxes via deductions but is ensnaring millions of middle-income payers because it was never adjusted for inflation.

Democrats are signaling that they will seek to pay for such changes by scaling back some of the tax cuts given to the wealthiest annual earners during President Bush's first term.

"We gave tax cuts to people at the top . . . and then took back the tax cuts to the people in the middle" through the AMT, said Representative Richard E. Neal, a Springfield Democrat who is chairman of the House Ways and Means subcommittee with authority over tax proposals.

Neal's Select Revenue Measures Subcommittee will hold the first of several hearings on the AMT today, and members of his committee hope to have a bill drafted by early spring.

Both parties agree that the AMT needs an overhaul. Yet while the White House has signaled a willingness to work with Democrats on reform proposals, any measure that imposes higher taxes on the wealthy is likely to spark a major battle with Republicans.

House minority leader John A. Boehner, an Ohio Republican, said Democrats seem to be looking to punish the rich with tax hikes that could stall economic growth.

"Sounds like a nice way of saying, 'We're going to raise your taxes,' " Boehner said of the early outlines of a Democratic plan. "Why would we want to risk the future growth of our economy in an effort to raise taxes on those that my colleagues across the aisle don't much like?"

The AMT was established to ensure that wealthy families pay at least some income taxes, rather than erasing their whole obligation through deductions and exemptions. But, in large part because the AMT was never indexed for inflation, middle-class taxpayers -- including many in wealthier states such as Massachusetts -- are being caught in the AMT's web and being forced to pay higher taxes than they would under the normal tax structure.

The AMT became law in 1969 to force roughly 150 wealthy individuals who were ducking taxes through deductions to pay federal income taxes. But now, if left unchanged, the AMT will force higher taxes on an estimated 23 million taxpayers when they file their 2007 returns next year; the biggest burden is due to fall on taxpayers with annual incomes of between $75,000 and $500,000 a year.

"More and more families see their incomes bumped up to the realm where they're affected," said Jason Furman, an economist at the liberal-leaning Brookings Institution.

The AMT forces people to calculate their taxes in two ways -- first with the deductions and exemptions available under the regular tax structure, and again with the vastly limited menu of exemptions available under the AMT. Taxpayers pay the higher of the two numbers.

For the past several years, Congress has passed temporary fixes to lessen the impact on taxpayers, making the AMT apply to only about 4 million taxpayers each year. But efforts to enact permanent adjustments have stalled amid political bickering.

The biggest obstacle to changing the system has been expense: Repealing the AMT would cost between $800 billion and $1.5 trillion over the next decade. Neal has long favored a total repeal, though some Democrats and interest groups are urging only a partial repeal aimed at shielding the middle class. Neal said all options are being considered by his committee.

House Democrats came into power this year promising "pay-as-you-go" budgeting, meaning that any action that drains revenues must be offset with a spending cut or revenue increase.

With the president's 2001 and 2003 tax cuts disproportionately benefiting the wealthy, Democrats are exploring ways to scale back those cuts to pay for cuts in the AMT, House Ways and Means chairman Charles Rangel said Sunday on Fox News Channel.

"We may be talking about redirecting those tax cuts," said Rangel, a New York Democrat. "And so, within the system, there can be more equity."

Rangel added that members of the Ways and Means Committee are working with Treasury Secretary Henry Paulson to find common ground on the AMT. The president has endorsed a permanent fix that doesn't put additional strain on the Treasury, though he has also called for making the 2001 and 2003 tax cuts permanent, said Tony Fratto , a White House spokesman.

"We're going to keep talking to Congress," Fratto said. "We do want to come up with a solution."

A move by Democrats to raise taxes on the wealthy would open Democrats up to political attacks. Pat Toomey, the president of the conservative group Club for Growth, said Congress should repeal the AMT, but shouldn't simultaneously look to raise taxes.

"Rangel's plan to undo the Bush tax cuts of 2001 and 2003 might as well be called the Economic Destruction Act of 2007," said Toomey.

But Neal said Democrats can maneuver around such opposition by pointing out how many middle-income taxpayers are being hurt by the current system, especially in higher-income states.