Thursday, January 04, 2007

Democrats may bend budget rule for tax fix

Democrats may bend budget rule for tax fix
By Richard Cowan

WASHINGTON (Reuters) - The House of Representatives plans to pass rules this week to reduce U.S. budget deficits, but a senior Democrat on Wednesday said he was open to bending those rules to fix a tax that otherwise will hit growing numbers of middle-income households.

Rep. John Spratt of South Carolina, the incoming chairman of the House Budget Committee, said Democrats might decide to waive new budget rules so that Congress can keep upper middle-class taxpayers from getting caught by a tax originally intended for the wealthy.

Under the new budget rules called "paygo," spending increases or tax cuts would have to be paid for with savings elsewhere in the budget or tax code. But that could make it harder for Democrats to keep their promise to eliminate deficits in five years while providing tax relief for the middle class.

Over the next several years, an estimated 20 million to 30 million middle-class taxpayers whose incomes rise with inflation could be forced to pay the alternative minimum tax, even though it was intended to prevent the very wealthy from using exemptions to avoid paying taxes.

Congress has approved a series of temporary fixes for the tax that was first enacted in 1969, but put off any permanent resolution because of its huge impact on the budget. Democrats say a more permanent fix for the AMT would cost the Treasury about $641 billion over 10 years.

Spratt said that under rules the new Democratic House majority plans to pass on Friday, there will be no exemptions to paygo. But he added, "That's not to say that you couldn't come back later in a budget resolution and have some sort of a dispensation from the rule for a certain-sized tax cut."

Republicans, including President George W. Bush's budget chief, Rob Portman, oppose the paygo rule, saying it will only encourage Congress to pass tax increases to reduce deficits.

"It's a plan to raise taxes, plain and simple," said Rep. Paul Ryan, a Wisconsin Republican and senior Budget Committee member.

Instead, Republicans say the government collects enough tax revenue and they want deficit cuts to be achieved by paring domestic spending. But over the past several years, while they controlled both houses of Congress, domestic spending rose significantly.

For fiscal 2006, which ended on September 30, the budget deficit was $247.7 billion.