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# Legislative Bulletin.................................................December 12, 2007

**Contents:**

**H.R. 4351**---AMT Relief Act

H.R. 4351---AMT Relief Act (*Rangel, D-NY*)

**[Order of Business]{.underline}**: On November 9, 2007, the House
[passed](http://clerk.house.gov/evs/2007/roll1081.xml) the Temporary Tax
Relief Act (H.R. 3996), which, appropriately named, would provide
temporary AMT tax relief for some (the AMT "patch") and permanent tax
increases for others. The Senate took up the House-passed bill, stripped
out the tax increases, and
[passed](http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=110&session=1&vote=00415)
a "clean" AMT "patch." However, reportedly the Senate has refused to
send the papers for the amended H.R. 3996 back to the House, fearing
that the House would just add back tax increases. Therefore, Ways &
Means Chairman Charles Rangel (D-NY) introduced a new bill, H.R. 4351,
in order to try to attach tax increases to the AMT "patch." Senate
Majority leader Harry Reid (D-NV) has indicated that an AMT "patch" bill
with tax increases attached will not pass the Senate.

The consideration today of H.R. 4351 is subject to the passage of the
closed rule, [H.Res.
861](http://thomas.loc.gov/cgi-bin/query/z?c110:H.Res.861:/), which
would allow no amendments, waive all points of order against considering
the bill (except those for earmarks and PAYGO), waive all points of
order against the bill itself, and allow for one motion to recommit,
with or without instructions.

To read the RSC Legislative Bulletin for H.R. 3996, visit this webpage:
<http://www.house.gov/hensarling/rsc/doc/lb_110907_amtpatch.doc>.

**[Summary]{.underline}**: H.R. 4351 would impose **\$55.74 billion** in
[permanent]{.underline} [tax increases]{.underline} on businesses and
individuals over ten years in order to offset the prevention of a huge,
unintended tax increase for tax-year 2007 (i.e. a one-year "patch" on
the exemption level for the Alternative Minimum Tax (AMT)). NOTE: Some
of the provisions in this bill were taken from Rep. Rangel's Tax
Reduction and Reform Act (H.R. 3920, commonly known by critics as the
"Mother of All Tax Hikes"). Highlights of H.R. 4351 are as follows:

-   [AMT "Patch" and Other AMT Fixes]{.underline}. Provides for a
    \$66,250 AMT exemption amount for married couples in 2007 (it was
    \$62,550 in 2006 and would drop to \$45,000 without a "patch"), for
    a \$44,350 exemption amount for singles (it was \$42,500 in 2006 and
    would drop to \$33,750 without a "patch"), and for an extension of
    the current-law relief for nonrefundable personal AMT credits. The
    "patch" would prevent the AMT from newly impacting tens of millions
    of families and businesses. This section would also prevent
    taxpayers with AMT credits from paying tax on "phantom" income
    attributable to incentive stock options (i.e. income that appears on
    paper but that the taxpayer has not actually exercised). ***Saves
    taxpayers \$52.85 billion over ten years.***

-   [Refundable Child Tax Credit]{.underline}. Reduces (beginning in
    tax-year 2008) the amount above which the portion of a taxpayer's
    income is refundable under the child tax credit from about \$11,000
    to \$8,500 and eliminates any inflation adjustments. ***Increases
    mandatory spending by \$2.87 billion over ten years.***

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-   [Deferred Compensation]{.underline}. Taxes individuals on a current
    basis if such individuals receive deferred compensation from certain
    offshore entities. Thus, deferred compensation would be taxed as it
    accrues, rather than when it's actually paid. Current law generally
    allows executives and other employees to defer paying taxes on
    compensation until the compensation is paid. ***Costs taxpayers
    \$23.71 billion over ten years.***

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-   [Economic Substance Doctrine]{.underline}. Codifies the "economic
    substance doctrine" used in certain court decisions, which prohibits
    businesses from making certain free-market business decisions (and
    from taking the related tax benefits) based solely on tax-lowering
    motives. The bill would also impose a 20% penalty on understatements
    attributable to a transaction lacking economic substance (40% in
    cases where certain facts are not disclosed). In other words, under
    this provision, companies could be assessed tax penalties for
    engaging in business transactions aimed primarily at lowering their
    tax bills. ***Costs taxpayers \$4.08 billion over ten years.***

-   [Worldwide Allocation of Interest]{.underline}. Delays by nine years
    (to tax-year 2018) the implementation of the provision allowing U.S.
    corporations to elect special (i.e. tax-lowering) interest
    allocation rules for foreign assets (used when determining the
    foreign income tax credit). ***Costs taxpayers \$26.21 billion over
    ten years.***

-   [Failure-to-File Partnership and S Corporation Returns Penalty
    Increases]{.underline}. Creates a uniform \$100 per
    partner/shareholder per month (up to 12 months, as opposed to \$50
    over five months in current law) penalty for failure to file a
    partnership return or an S corporation return for a taxable year.
    ***Costs taxpayers \$1.62 billion over ten years.***

-   [Failure-to-File General Returns Penalty Increases]{.underline}.
    Increases the failure-to-file penalty for general tax returns to the
    lesser of \$150 (up from \$100 in current law) or 100% of the amount
    required to be shown on such return. ***Costs taxpayers \$118.0
    million over ten years***

-   [Estimated Corporate Tax Payments]{.underline}. Increases the
    estimated tax payments that certain corporations must remit to the
    federal government. Under current law, corporations with assets of
    at least \$1 billion must make estimated tax payments for the third
    quarter of 2012 that are 115% of the estimated payment otherwise
    due. The payment due for the fourth quarter of 2012 is reduced
    accordingly so that the corporations pay no net increase in
    estimated payments in 2012. H.R. 4351 would increase this percentage
    (whatever it may be in current law when H.R. 4351 were enacted) by
    52.5 percentage points. This large increase would force applicable
    companies to increase their estimated payments by about **\$31.71
    billion** in the last quarter of FY2012 (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 ten years. Without this gimmick,
    the bill would fail the PAYGO test for the five-year period.

> []{.mark}
>
> [NOTE]{.underline}: This bill does [NOT]{.underline} include one-year
> tax extenders like the research and development tax credit.

[]{.mark}

**[Additional Background]{.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 2007) 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 **[23 million taxpayers may be subject
to the AMT in 2007]{.underline}**.

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.

**[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 December 11, 2007, the bill was
referred to the Ways & Means Committee, which took no subsequent
official action on it.

**[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 approach, i.e.
the tax-increase approach, and thus with the legislation summarized
above, since it offsets [temporary]{.underline} tax relief with
[permanent]{.underline} tax increases.

Most 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}

Most 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. 4351. 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. 4351,
including, but not limited to (in no particular order):

[]{.mark}

-   [Economic Substance Doctrine]{.underline}: Businesses should not be
    punished for making market-driven, legal business decisions aimed
    solely at reducing their tax liabilities. Reducing one's tax bill
    should not be something worthy of prohibition or penalty.

-   [Refundable Child Tax Credit]{.underline}: The refundable child tax
    credit would be greatly expanded by this bill. Many conservatives
    regard refundable tax credits as spending through the tax code, no
    different than a direct appropriation from the Treasury to
    individuals who have not paid taxes that year. Many conservatives
    may see this refundable credit expansion as particularly offensive
    in this legislation, since it is paired with numerous provisions
    increasing taxes on businesses and people that do have net tax
    liabilities.

-   [Deferred Compensation]{.underline}. Many conservatives have
    expressed concern at discouraging incentive-based compensation and
    forcing individuals to pay tax on such incentives before they have
    even been received.

[]{.mark}

-   [Timing Shift Budget Gimmick]{.underline}. Some conservatives may be
    concerned that the corporate estimated tax payments timing shift (a
    budget gimmick for complying with PAYGO rules on paper) is quite
    large in this legislation (usually the payment shift is much
    smaller), forcing some companies to pay nearly double their normal
    estimated tax payment for the fourth quarter of fiscal year 2012
    (\$31.7 billion in shifted payments). American businesses should not
    be forced to come up with this much extra money in a quarter to
    remit to the federal government just because of Congress' desire for
    budget gimmickry.

**[Administration Position]{.underline}**: Although a Statement of
Administration Policy (SAP) for H.R. 4351 was not available at press
time, in its SAP for H.R. 3996, the Administration 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
estimates that H.R. 4351 would provide \$52.85 billion in tax-savings
over ten years, \$55.74 billion in tax increases over ten years, and
increase mandatory spending by \$2.87 billion over ten years (refundable
child tax credit provision).

**[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}**: Based on previous, related
reports from the Joint Committee on Taxation and CBO, the bill contains
no intergovernmental mandates and one private-sector mandates within the
meaning of Public Law No. 104-4, the Unfunded Mandates Reform Act of
1995:

-   delaying the application of the worldwide allocation of interest
    expense.

**[Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax
Benefits/Limited Tariff Benefits?]{.underline}**: The following
statement was filed in the *Congressional Record* yesterday: "H.R. 4351,
the AMT Relief Act of 2007, does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in clause
9(d), 9(e), or 9(f) of Rule XXI."

[]{.mark}

**[Constitutional Authority]{.underline}**: A committee report for H.R.
4351 is unavailable. For H.R. 3996, the Ways & Means Committee, in
[House Report
110-431](http://www.congress.gov/cgi-lis/cpquery/R?cp110:FLD010:@1(hr431)),
cited 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 the
legislation at press time include, at a minimum:

-   American Conservative Union;

-   Americans for Prosperity;

-   Americans for Tax Reform; and

-   National Taxpayers Union.

[NOTE]{.underline}: Americans for Tax Reform does [NOT]{.underline}
consider H.R. 4351 a violation of the Taxpayer Protection Pledge.

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