Congress finally has given taxpayers a Christmas gift, but the bill will be charged to their grandchildren.
The House and Senate last week agreed to provide $50 billion in tax relief for millions of households facing the dreaded alternative minimum tax. Without this action, mostly upper-middle-class taxpayers would have paid an average of $3,000 more on their federal taxes for 2007.
But lawmakers' temporary solution is just as fiscally irresponsible as it has been in previous years. The one-year "fix" to the AMT problem will be borrowed, adding to the national debt. There was a better way.
House Democrats had insisted on paying for the tax relief with revenue elsewhere, primarily by closing a loophole dealing with offshore tax havens. Some lawmakers also wanted to end a special tax break for highly paid money managers on Wall Street to help pay for the AMT solution. Both proposals made sense.
Senate Republicans, however, had enough votes to block this strategy. The GOP prevailed in passing on the cost of this tax relief to future generations, just as it did when Republicans controlled Congress.
"Congressional Republicans repeatedly and stubbornly resisted our efforts," said Rep. Allyson Schwartz (D., Pa.), a member of the tax-writing House Ways and Means Committee.
So it came down to either a poor choice or a worse one: Shield 23 million taxpayers from a tax increase by borrowing the money, or impose a hefty tax hike in the new year on all of those taxpayers. Congress took the easy way out.
The AMT was created in 1969 to ensure that a small number of wealthy taxpayers couldn't avoid paying any taxes. But the law was never adjusted for inflation. As salaries rose, more taxpayers got snared by the AMT, which uses tighter restrictions on deductions for calculating taxes owed.
The tax cuts enacted by President Bush ended up pushing even more taxpayers into the AMT trap, although many of them were earning less than $200,000 per year.
Even with the action by Congress, early tax refunds may be delayed in 2008. The IRS needs about seven weeks after the law is approved to change its forms, which could cause delays in processing returns.
This decision by Congress also represents a retreat by House Democrats on their "pay-as-you-go" promise, which required that all tax cuts or spending increases be offset by corresponding tax increases or spending cuts to stop adding to the federal deficit. In the case of the AMT, though, Republicans left them with no real choice.