WASHINGTON -- Capping a spirited debate, House members voted yesterday to shield more than 23 million Americans from a tax increase this year under the alternative minimum tax -- and to make wealthy managers of investment firms such as private equity and hedge funds pay for it.
The 216-193 vote, which closely followed party lines, escalated an emerging political battle over tax priorities, after years of Republican anti-tax fervor. While members of both parties overwhelmingly wish to defuse the alternative minimum tax, they have a sharp dispute on how to do it.
Many Democrats seek to shift the tax burden toward the richest Americans, while many Republicans argue that the bill was just the first step toward major tax increases that they say are sought by the Democrats who now control both houses of Congress.
"I feel like the little boy in Holland sticking his thumb in the dike," said Rep. Jim McCrery of Louisiana, senior Republican on the Ways and Means Committee. "If I'm not here today about to stick my thumb in the dike ... we're going to have a torrent, a flood of tax increases over the next 10 years."
Democrats contend the proposal would restore fairness to the nation's tax structure.
"How can you possibly call it a tax increase when we're trying to bring some degree of equity to the system?" asked Rep. Charles B. Rangel, the New York Democrat who is chairman of the House Ways and Means Committee and the main author of the tax plan.
The debate now shifts to the Senate, where the tax increase is highly controversial, including among some Democrats who have received big campaign donations from investors who would face higher taxes under the plan. The Bush administration has said it would veto a tax increase.
Meanwhile, the Internal Revenue Service has warned that action on the alternative minimum tax is required soon to prevent disruptions for filers.
The tax was created in 1969 to guarantee that a small number of the nation's richest households would pay at least some taxes. But because the provision was not indexed for inflation, it has threatened to pinch a growing number of Americans, forcing Congress to repeatedly defuse it.
It could affect families who earn $75,000 or even less, although the biggest impact is on more affluent households.
The bill approved yesterday would shelter millions of families from the alternative minimum tax while making up the lost tax revenue by requiring managers of investment partnerships, such as private equity funds, to pay ordinary income tax rates on more of their income, rather than a lower capital gains rate.
In many cases, such a change would raise the tax rate for well-heeled fund managers to 35 percent from 15 percent now.
The bill also would restrict the ability of very affluent Americans, notably hedge fund managers, from reducing their tax rates through the use of offshore tax shelters.
In addition, it would extend a handful of tax provisions affecting individuals and businesses scheduled to expire this year.
These include provisions that allow for itemized deductions of state and local sales taxes, and continue a tax break for tuition expenses.
Jonathan Peterson and Richard Simon write for the Los Angeles Times.