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# Legislative Bulletin.....................................................June 25, 2008

**Contents:**

**H.R. 6275**---Alternative Minimum Tax Relief Act

H.R. 6275---Alternative Minimum Tax Relief Act (*Rangel, D-NY*)

**[Order of Business]{.underline}**: The bill is scheduled to be
considered on Wednesday, June 25^th^, likely subject to a closed rule
(allowing no amendments). The RSC will summarize the rule, if necessary,
in a subsequent document.

**[Summary]{.underline}**: H.R. 6275 would impose **\$61.6 billion** in
[permanent]{.underline} [tax increases]{.underline} on businesses and
individuals over eleven years in order to prevent [for just one
year]{.underline} a huge, unintended tax increase. The main purpose of
this bill is to place a one-year "patch" on the exemption level for the
Alternative Minimum Tax (AMT), without which more than 25 million
taxpayers would be subject to a large tax increase beginning in tax-year
2008.

NOTE: Last year, Congress and the President enacted a "clean" AMT patch
for tax-year 2007 ([Public Law
110-166](http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03996:/))
without any tax increases, after several attempts to patch the AMT with
accompanying tax increases.

Highlights of H.R. 6275 are as follows:

-   [AMT "Patch"]{.underline}. Provides for a \$69,950 AMT exemption
    amount for married couples in 2008 (it was \$66,250 in 2007 and
    would drop to \$45,000 without a "patch"), for a \$46,200 exemption
    amount for singles (it was \$44,350 in 2007 and would drop to
    \$33,750 without a "patch"), and the current-law relief for certain
    nonrefundable personal AMT credits. ***Saves taxpayers \$61.52
    billion over eleven years.***

-   [Carried Interest]{.underline}. Requires investment fund managers to
    treat carried interest as ordinary income (and thus be taxed at a
    higher rate) and increases the penalty for underpayments. Currently,
    carried interest is taxed at the capital gains rate, since carried
    interest is a capital gain. Carried interest is the name given to
    the compensation that fund managers earn based on the performance of
    the fund which they manage. This compensation is the main
    performance incentive driving fund managers to do better---but such
    compensation only comes from capital gains. It is by no means
    "ordinary" income. In fact, this capital gain revenue is already
    subject to the 35 percent [corporate]{.underline} tax rate before it
    is distributed to investors as capital gains or dividends, meaning
    that it is already double-taxed when the manager receives it, even
    at the 15 percent capital gains rate. Note: The bill would continue
    to tax carried interest at the capital gains tax rates to the extent
    that carried interest reflects a "reasonable" return on invested
    capital, as defined in the bill. The carried interest provisions
    would also apply to real estate partnerships and trusts, which had
    previously been excluded. ***Costs taxpayers \$30.98 billion over
    eleven years.***

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-   [Special Carve-Out for Oil and Gas]{.underline}. Denies a corporate
    tax deduction for income attributable to the production, refining,
    processing, transportation, and distribution of oil, natural gas, or
    any primary product thereof, beginning in 2009, for the five largest
    oil and gas companies. For any other (i.e. smaller) oil and gas
    manufacturing activity that would still qualify for the deduction,
    the rate would be permanently frozen at 6%, instead of rising to 9%,
    as scheduled under current law. According to the Joint Committee on
    Taxation, this provision would amount to a ***\$13.57 billion tax
    increase*** on oil and gas companies over eleven years.

[]{.mark}

-   [Increased Taxes on Domestic Subsidiaries of Multinational
    Corporations]{.underline}. Denies certain U.S. subsidiaries of
    multinational companies the benefits of tax treaties in certain
    circumstances. When a U.S. subsidiary of a foreign-owned company
    makes certain tax-deductible payments (like interest, rents, and
    royalties) to a related party located in another country, the U.S.
    imposes a tax on those payments.  The default rate is 30%, but this
    rate can be reduced, sometimes down to 0%, by tax treaties.  The
    U.S. has 58 tax treaties with 66 different countries. H.R. 6275
    would deny the U.S. subsidiary the benefits of the negotiated treaty
    rate when those tax-deductible payments are made by the subsidiary
    to a related foreign company, if the ultimate parent of the
    multinational company is based in a country that does not have a tax
    treaty with the U.S. ***Costs taxpayers \$6.94 billion over eleven
    years.***

-   [Credit Card Reporting to the IRS]{.underline}. Requires banks and
    other institutions that make payments to domestic merchants in
    settlement of credit and debit card transactions to file information
    on such transactions with the Internal Revenue Service. This
    provision is aimed at closing the "tax gap" and is based on the
    assumption that merchants are underreporting their credit and debit
    transactions. ***Costs taxpayers \$9.80 billion over eleven
    years.***

-   [Expansion of Levy Authority]{.underline}. Expands to property the
    types of things on which the federal government could place a levy
    when a taxpayer owes money to the federal government. Currently, the
    federal government may attach a continuous levy to payments made by
    the federal government to "vendors of goods or services sold or
    leased to the Federal Government," if such vendors owe the
    government taxes. H.R. 6275 would clarify that the federal
    government may attach a continuous levy to vendors of property.
    ***Costs taxpayers \$301.0 million over eleven years.***

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-   [Estimated Corporate Tax Payments]{.underline}. Increases the
    estimated tax payments that certain corporations must remit to the
    federal government. Corporations with assets of at least \$1 billion
    would have to make estimated tax payments for the third quarter of
    calendar-year 2013 that are 159.5% of the estimated quarterly
    payment otherwise due. The payment due for the fourth quarter of
    calendar-year 2013 would be reduced accordingly so that the
    corporations pay no net increase in estimated payments in
    calendar-year 2013. This large increase would force applicable
    companies to increase their estimated payments by ***\$46.63
    billion*** in the last quarter of fiscal year 2013 (though they
    would be offset by a corresponding reduction in the subsequent
    quarter). **[NOTE]{.underline}:** This provision is merely a revenue
    timing shift, a budget gimmick used to comply with the House's PAYGO
    rules and has no net budget effect over eleven years. Without this
    gimmick, the bill would fail the PAYGO test for the six-year period.

> []{.mark}

**[Additional Background]{.underline}**:

[AMT]{.underline}: The AMT was created in 1969 as a
[mandatory]{.underline} add-on to the existing tax code to prevent 155
of the very wealthiest taxpayers from lowering their tax bills using the
available deductions and credits. The AMT's reach has since grown
dramatically through bracket creep.

The AMT has a two-tiered rate structure, 26% and 28%, and an exemption,
so that most people do not currently pay the AMT (which is always a
higher tax than the tax calculated under the regular tax system).

Unlike other exemptions in the tax code, the AMT exemption (currently
\$45,000 for joint returns in tax-year 2008) is [not adjusted for
inflation]{.underline}. As a result, though meant for the wealthiest of
taxpayers, 3.5 million taxpayers were subject to the AMT in 2006, and
tax organizations estimate that over **[25 million taxpayers may be
subject to the AMT in 2008]{.underline}**, absent congressional action.

Another important reason the AMT is negatively impacting more and more
taxpayers is the 1993 tax increase, written by a Democrat Congress and
signed into law by President Clinton. The Democrats raised the then-24%
rate to 26% on the first \$175,000 of AMT-taxable income above the
exemption and 28% on the AMT-taxable income in excess of \$175,000.

[Section 199 Tax Deduction]{.underline}: Current law (26 U.S.C. 199),
passed as part of the "FSC-ETI" bill (Public Law 108-357), provides for
a (phased-in 9%) corporate tax deduction for **[nearly
all]{.underline}** domestic economic manufacturing and production
(except retail food sales and the transmission or distribution of
electricity, natural gas, or drinkable water). This tax deduction was a
replacement for the extraterritorial income ("ETI") exclusion deemed
noncompliant with requirements of the World Trade Organization. This
bill would add oil and gas production and distribution as an
**[exception]{.underline}** to this broad deduction so that they could
[not]{.underline} deduct such expenditures (and thus be subject to a
substantial tax increase). This would amount to a multi-billion-dollar
tax increase on oil and gas companies that could yield higher energy
prices for consumers.

**[Disincentives for domestic energy production and investment naturally
make foreign energy investment and reliance more
attractive.]{.underline}**

Democrats have cited increasing oil-industry profits as the prime
motivation behind this legislation. Thus, Democrats believe it is the
federal government's responsibility to determine which American
companies' profits are too high and to subsequently try to reduce them.
Furthermore, Americans for Tax Reform has noted that, "Almost all large
oil and gas companies are publicly-traded entities, whose shares are
owned by millions of investors through their 401(k) plans, retirement
plans and pension funds. Taxing away the earnings of those companies
negatively impacts the ability of hard-working Americans to achieve a
more financially secure future."

On January 16, 2007, the *Wall Street Journal* editorialized about H.R.
6, which contained the Section 199 carve-out for oil and gas by noting
that "the biggest winner may be OPEC." On the same day, even the *New
York Times* cast doubt on the repeal of tax incentives in H.R. 6: "Fair
enough, but that's not an energy policy."

According to the American Petroleum Institute (API), citing [information
from the Department of Energy's Energy Information Administration
(EIA)](http://www.eia.doe.gov/emeu/finance/frsdata.html), in 2006, the
top 27 energy producing companies accounted for about 44% of the total
U.S. crude oil and natural gas production, and 81% of U.S. refining
capacity. In that same year, these companies paid about \$81.5 billion
in income taxes (**an 82% increase in just two years**), resulting in an
overall effective tax rate of 37%--- more than the top U.S. corporate
income tax rate of 35%.

**[RSC Bonus Fact]{.underline}**: In 1999, the Republican Congress sent
legislation to the President fully repealing the AMT, yet President
Clinton vetoed that bill.

**[Committee Action]{.underline}**: On June 17, 2008, H.R. 6275 was
introduced and referred to the Ways & Means Committee, which, on June
18^th^, marked up the bill and ordered it reported to the full House by
a party-line vote of 22-16.

**[Possible Conservative Concerns]{.underline}**: Consensus is building
around the need to [repeal]{.underline}, not just "patch" for one year,
the AMT for individuals, which is a mandatory recalculation of the tax
bill of certain taxpayers that always leads to higher taxes for these
taxpayers. Repealing the AMT would save taxpayers billions of dollars
immediately and thereafter.

One significant point of controversy is whether the repeal of the AMT
should be "offset" by tax increases or spending cuts elsewhere. In
short, the offset approach is based on the notion that the government
*[is entitled to]{.underline}* the increasingly higher tax revenues from
the AMT (even though these higher revenues were never intended to be
collected). That is, this approach is based on the philosophy that the
correction of tax mistakes [should]{.underline} be offset with tax
increases so that there is no net loss of revenue to the federal
government, even if the tax increases apply to different people than do
the tax mistakes. The offset approach takes a government-first
perspective; it views revenues from the vantage point of the federal
government, rather than from the individual taxpayer.

Most conservatives have grave concerns with the offset (i.e.
tax-increase) approach and thus with the legislation summarized above,
since it offsets [temporary]{.underline} tax relief with
[permanent]{.underline} tax increases.

Many conservatives believe on principle that no tax relief, especially
income tax relief, *needs* to be offset, since tax relief is savings to
taxpayers. Most tax relief allows taxpayers to keep more of their own
money; it does not "cost" the government anything. If, however, tax
relief must be offset, it should be offset with spending reductions, not
tax increases.

[]{.mark}

Many conservatives would argue that the principled opposition to
offsetting tax relief *especially* applies in instances where the tax
relief is being provided to correct a mistake or oversight by the
federal government, as it does in the case of the AMT. The correction of
tax mistakes applicable to one set of people should never be offset with
tax increases on a different set of people, as would be the case under
H.R. 6275. That is, most conservatives believe that it is improper for
the federal government to punish some people and businesses with higher
taxes just because the federal government unintentionally increased
taxes on other people.

Under current law, the Congressional Budget Office projects that federal
revenues will increase faster than economic growth. In other words, the
tax burden (measured as a percentage of Gross Domestic Product) is
expected to increase. This would still be true, just to a smaller
extent, if the AMT were reduced or even eliminated. Thus, the only
rationale for "paying" for an AMT reduction with any offsetting tax
increase is the belief that the tax burden *should be*
*[higher]{.underline}* than it currently is or than what it has
historically been. Conservatives believe in a lower tax burden for all
Americans.

[]{.mark}

Many conservatives have expressed strong objections to some of the
particular tax increases and other provisions included in H.R. 6275,
including:

[]{.mark}

-   [Carried Interest]{.underline}: "Carried interest" is just another
    phrase for gains made from investments. It is by no means "ordinary"
    income since it is incentive compensation based solely on capital
    gains that may or may not be realized. Should capital gains not be
    taxed at the capital gains rate? Changing the carried interest
    taxation rates would both remove a huge incentive for investment
    fund managers to make their funds more profitable to investors and
    force partners to offer high pre-tax compensation to fund managers,
    thereby lowering returns for millions of investors who rely on
    capital gains or dividend income.

[]{.mark}

-   [Marriage Penalty]{.underline}: The AMT "patch" contains a large
    marriage penalty (since the exemption for married couples filing
    jointly is not double that for singles). Note: The existing
    exemption already contains a marriage penalty, but this "patch" does
    nothing to correct that.

[]{.mark}

-   [Energy Tax Increases]{.underline}. The bill would carve oil and gas
    companies out of a broad domestic manufacturing tax deduction
    available to nearly all manufacturing in the United States, yielding
    disincentives for domestic energy production and investment and
    making foreign energy investment and reliance more attractive. At a
    time when gas prices are soaring and energy supplies are
    artificially constrained, increasing taxes on energy companies will
    make it even less likely that energy prices can come down.

-   [Credit Card Reporting]{.underline}. The credit/debit card reporting
    requirement raises concerns over increased administrative and cost
    burdens on merchants (to reconcile the information provided by the
    banks and third-party payment reconcilers with their own books,
    records, and tax returns) and the banks and payment reconcilers (to
    compile the required information). Concerns have also been expressed
    about whether the IRS can even use the huge volume of information it
    would receive to properly find underreporting merchants. Lastly, the
    approach taken by this provision violates the "voluntary" tax system
    in which the taxpayer is trusted to provide accurate information,
    unless information arises to cause suspicion to the contrary. This
    provision would assume all merchants guilty until proven innocent
    and would require banks and third-party payment reconcilers to
    essentially "tattle" on their customers (the merchants).

    -   [Timing Shift Budget Gimmick]{.underline}. Some conservatives
        may be concerned about the use of a corporate estimated tax
        payment timing shift as a budget gimmick for complying with
        PAYGO rules on paper. This particular shift is quite large (most
        payment shifts used previously in other Democrat bills have been
        much smaller), forcing some companies to pay more than
        one-and-a-half times their normal estimated tax payment for the
        fourth quarter of fiscal year 2013 (\$43.6 billion in shifted
        payments). American businesses should not be forced to come up
        with extra money in a quarter to remit to the federal government
        just because of Congress' desire for budget gimmickry.

Lastly, the Joint Committee on Taxation estimates that the costs
required to comply with the bill's mandates [would exceed]{.underline}
the annual threshold established by UMRA for private-sector mandates
(\$136 million in 2008, adjusted annually for inflation) in each of the
next 10 years (2009 through 2018), thereby yielding an UMRA point of
order against the bill's consideration.

**[Administration Position]{.underline}**: Although a Statement of
Administration Policy (SAP) for H.R. 6275 was not available at press
time, the SAP for H.R. 3996 last year, an AMT patch bill with
accompanying tax increases, noted that, "the Administration does not
believe the appropriate way to protect 21 million additional taxpayers
from 2007 AMT liability is to impose a tax increase on other taxpayers.
[Accordingly, if H.R. 3996 were presented to the President in its
current form, the President's senior advisors would recommend he veto
the bill]{.underline}."

**[Cost to Taxpayers]{.underline}**: The Joint Committee on Taxation
(JCT) estimates that H.R. 6275 would save taxpayers \$1.133 billion in
FY2008 and \$49.656 billion over the FY2008-FY2012 period. These net tax
benefits would disappear over the ten-year period.

**[Does the Bill Expand the Size and Scope of the Federal
Government?]{.underline}**: The bill would permanently increase taxes on
some businesses and individuals and temporarily offer tax relief to
others.

**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-Sector Mandates?]{.underline}**: According to the JCT, H.R. 6275
contains no intergovernmental mandates, but does contain four
private-sector mandates, as defined in the Unfunded Mandates Reform Act
(UMRA):

-   Carried interest;

-   Oil and gas tax increase;

-   The tax treaty provision; and

-   The credit/debit card provision.

**The JCT estimates that the costs required to comply with the mandates
[would exceed]{.underline} the annual threshold established by UMRA for
private-sector mandates (\$136 million in 2008, adjusted annually for
inflation) in each of the next 10 years (2009 through 2018).**

**[Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax
Benefits/Limited Tariff Benefits?]{.underline}**: The Ways & Means
Committee, in [House Report
110-728](http://thomas.loc.gov/cgi-bin/cpquery/R?cp110:FLD010:@1(hr728)/),
asserts that, "Pursuant to clause 9 of rule XXI of the Rules of the
House of Representatives, the Ways and Means Committee has determined
that the bill as reported contains no congressional earmarks, limited
tax benefits, or limited tariff benefits within the meaning of that
rule."

[NOTE]{.underline}: This bill contains a limited tax
**[harm]{.underline}** (the special carve-out for oil and gas companies
from the broad manufacturing tax deduction), though House Rules does not
provide a point of order against limited tax harms---just benefits.

**[Constitutional Authority]{.underline}**: The Ways & Means Committee,
in [House Report
110-728](http://thomas.loc.gov/cgi-bin/cpquery/R?cp110:FLD010:@1(hr728)/),
cites constitutional authority in Article I, Section 8, Clause 1 (the
congressional power to lay and collect taxes, duties, imposts, and
excises to pay the debts and provide for the common defense and general
welfare of the United States) and the 16^th^ Amendment (the
congressional power to tax incomes).

**[Outside Organizations]{.underline}**: [Opponents]{.underline} of H.R.
6275 at press time include, at a minimum:

-   American Conservative Union;

-   Americans for Prosperity\*;

-   Americans for Tax Reform\* ;

-   FreedomWorks\*;

-   National Taxpayers Union\*; and

-   Small Business and Entrepreneurship Council.

\* = key-voting

The payment card reporting provision of the bill is being specifically
opposed by:

-   Air Conditioning Contractors of America;

-   Alliance of Independent Store Owners and Professionals;

-   American Bankers Association;

-   Americans for Tax Reform;

-   Associated General Contractors of America;

-   Independent Community Bankers of America;

-   Information Technology Association of America;

-   National Association for the Self-Employed;

-   National Electrical Manufacturers Association;

-   National Federation of Independent Business;

-   North American Retail Hardware Association;

-   Petroleum Marketers Association of America;

-   Printing Industries of America;

-   Saturation Mailers Coalition;

-   Small Business Legislative Council;

-   Society of American Florists ;

-   Specialty Tools and Fasteners Distributors Association;

-   Tire Industry Association; and

-   U.S. Chamber of Commerce.

**[RSC Staff Contact]{.underline}**: Paul S. Teller,
<paul.teller@mail.house.gov>, (202) 226-9718