House approves bill on alternative minimum tax

By Donna Smith

WASHINGTON (Reuters) - With time running out before the income tax filing season begins in January, the U.S. House of Representatives on Wednesday passed a bill that would ensure millions of middle income taxpayers do not become ensnared by a tax meant for millionaires.

But the alternative minimum tax relief legislation would also raise revenues, mostly by cracking down on offshore tax avoidance by hedge fund managers, and it faces a veto by President George W. Bush.

"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," the White House said in a policy statement.

The House voted 226 to 193, mostly along party lines, for the bill. It heads over to the Senate where it faces strong opposition from Republicans, making it difficult if not impossible for Democratic leaders to win the 60 votes needed in the 100-member chamber to advance legislation.

The alternative minimum tax was enacted in 1969 to ensure that the very wealthy had to pay some taxes, but because of the effects of inflation, the tax now threatens to ensnare millions of middle-income families.

If Congress fails to act before the end of the year, around 20 million U.S. taxpayers who otherwise would escape the tax, may end up owing the AMT when they file their 2007 tax return, due by April 15. Congress for years has passed bills granting relief from the AMT on a temporary basis.

The Senate last week passed a bill that included no revenue-raising measures to make up for the roughly $50 billion loss to the federal treasury from extending alternative minimum tax relief through this year and might just send that bill to the House.

Bush and his Republican allies in Congress want to extend AMT relief without raising other revenues to cover the cost. Democrats argue that would mean the government would have to borrow the money, adding more red ink to the $9 trillion national debt.

House Ways and Means Committee Chairman Charles Rangel said the bill would close a loophole that allows rich hedge fund managers to shelter income offshore, which called "indecent and immoral"

In order to pass the Senate version of the bill, which does not include any revenue raising measures, the House would have to waive rules that require any new spending or tax breaks be paid for elsewhere in the budget.

"This country is hemorrhaging. There are warning signs all over the globe about our fiscal recklessness," said Rep. John Tanner, a Tennessee Democrat who insists on paying for the cost of the one-year AMT fix.

(Editing by Cynthia Osterman)