Pay Go, Pay Gone: AMT Drives Senate Dems to Blink

To the surprise of no-one, the Senate has blinked in the stand-off over whether Congress will pay for the cost of patching the Alternative Minimum Tax for another year. The question now: Will House Democrats stand firm, or will they too cave in to the big-bucks lobbying campaign of the hedge fund and private equity industry?

The cracks are showing. Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) wanted to raise taxes on the compensation of the general partners in these financial deals as a way to pay, at least in part, for temporary AMT relief. Rangel still wants to offset the $50 billion cost of fixing the AMT for 2008, but he will drop the tax hike for private equity managers. Rangel says he will insist on other new revenues, including a tax hike on private equity fund assets that are shipped offshore. But some senior House Democratic leaders are hinting that they will give up the fight for any offsets.

The politics of all of this is fascinating. Senate Republicans, who have now abandoned all pretense of fiscal responsibility, refuse to support any proposal to pay for the AMT fix. They oppose, in lock-step, any offsetting tax hikes. This, according to Senate GOP Leader Mitch McConnell (R-Ky.), is a matter of principle. I'd like to see McConnell propose $50 billion in specific offsetting spending cuts as an alternative, but no such plan appears forthcoming.

All this, of course, let Senate Democrats, such as Chuck Schumer (D-N.Y.) off the hook. Schumer, always a friend to Wall Street, was quietly looking to bury the tax hike on hedge fund managers. But the GOP did the dirty work for him. No fingerprints.

In the House, conservative Blue Dog Democrats say they will stand firm and oppose any AMT relief that is not paid for. Rangel and the Blue Dogs make an odd pairing and it remains to be seen whether they can hold out, especially with the Bush Administration claiming millions of taxpayers will have their refunds delayed unless Congress acts immediately.

This isn't just a squabble over whether to raise taxes on gazillionaires. When Democrats regained control of Congress last year, they restored paygo rules, which require that tax cuts and entitlement spending increases are paid for. So far they have, mostly, stuck with these requirements. But if they abandon them in the face of pressure from hedge fund operators, what will they do when their own constituents demand more spending for, say, health care?