Plan to ease middle-class taxes falters

House Democrats' promise to permanently protect millions of middle-class families from a mostly unknown tax increase is faltering before it's even unveiled.

Senate Democrats are pressing a Band-Aid approach to delay for just a year or two the alternative minimum tax, or AMT, from adding $2,000 more in taxes on average to families with incomes between $100,000 and $200,000 a year.

That way Democrats wouldn't have to go into next year's election after having tried, and probably failed, to raise income taxes on wealthy taxpayers _ those making $500,000 or more _ back to almost what they were before President Bush took office.

New York Rep. Charles Rangel, chairman of the tax-writing House Ways and Means Committee, would like to rewrite the AMT to once-and-for-all prevent it from ensnaring about 20 million additional and unsuspecting middle-class taxpayers. He and Rep. Richard Neal, D-Mass., had planned to unveil their plan in May but now that's not likely to occur before September, if then.

The problem is that Rangel's and Neal's plan is a nonstarter in the Senate, where the tax-writing Finance Committee's chairman, Sen. Max Baucus, D-Mont., is up for re-election next year in a state whose voters overwhelmingly favored Bush in 2004.

Baucus has shown no interest in a Rangel-Neal proposal to pay for protecting middle-class voters from an AMT increase by instead imposing a new 4 percent or so surcharge on incomes above $500,000 a year. That would effectively raise the marginal tax rate on those with half-million-dollar incomes back to 39 percent, where it was in 2000.

The tax increase on the wealthy would raise an eye-popping $800 billion over 10 years, enough to both fix the AMT and spread smaller benefits to lower income taxpayers.

Some House Democrats already are touting provisions to raise the standard deduction, make the child tax credit fully refundable for low-income parents and increase the earned income tax credit for workers with more than two children.

Such add-ons would broaden the reach of the bill to give tax cuts to about 85 million people, while raising taxes on about 2.5 million taxpayers at the very top, said Rep. Chris Van Hollen, D-Md. Those wealthy taxpayers would still pay less than they did before President Bush's tax cuts took effect in 2001.

Baucus is considering a one- or two-year alternative that would protect middle-income taxpayers, costing up to $50 billion a year that would be partially paid for by closing loopholes and other changes in the tax law.

Many Democrats, including party leaders, appear comfortable with Baucus' temporary fix rather than forcing a politically risky vote to raise taxes when the idea isn't going anywhere in the Senate.

"If you have anything close to a marginal district, I wouldn't touch it with a 10-foot pole," said Rep. Paul Ryan, R-Wis.

The AMT originally was designed to make sure that the wealthiest couldn't use tax breaks or deductions to eliminate their entire tax liability. But inflation and recent tax cuts push more and more taxpayers into the grasp of the minimum tax each year, depriving about 4 million tax filers from taking full advantage of various deductions and tax credits.

The threat facing taxpayers is very real: more than one-third of taxpayers making between $75,000 and $100,000 a year face an AMT hit of almost $1,000 next April filing season if the tax code isn't fixed, either permanently or with another patch. Taxpayers making between $100,000-$200,000 face an average $2,000 in additional tax.

One factor complicating Democrats' task is the unusual dynamic involving the minimum tax. Most people don't know they may be facing the tax, so there's hardly a grass-roots outcry for AMT reform. At the same time, those facing tax increases are sure to rebel. Leading that column, according to Republicans, will be small businesses that file as individuals.

"The people you do raise taxes on will know," said a senior Senate GOP tax aide. "Trust me. They always do."