Senate Minority Leader Mitch McConnell (R-Ky.) offered a new deal to congressional Democrats on a tax-relief package that includes a one-year patch to the Alternative Minimum Tax (AMT).

McConnell said the chamber’s 49 Republicans would agree to offsets — spending cuts or tax increases — to the AMT patch and expiring tax breaks, but only if House and Senate Democrats lower their proposed 2009 domestic spending to make up for the lost revenue.

“The Senate Republican Conference will agree to offset the revenue lost from new tax relief policy with spending reductions or revenue raised from appropriate tax policy proposals,” McConnell wrote in a letter Thursday to Senate Majority Leader Harry Reid (D-Nev.) and House Speaker Nancy Pelosi (D-Calif.).

The GOP has been under pressure from business lobbyists to push through expiring energy tax breaks included in the package of so-called tax extenders.
 
“In exchange,” McConnell called for House and Senate Democrats to lower their demands for domestic spending in fiscal 2009.

“If agreed to, extension of expiring tax relief, including extension of the AMT patch and expiring energy tax incentives, could be accomplished in a way that achieves your stated goal of being deficit-neutral but without the unstated and unwarranted result of increasing the size of the federal government,” McConnell wrote.

In a statement, Reid said he was “pleased that Republicans appear to have abandoned their fiscally-irresponsible ways when it comes to the extenders bill,” but did not say whether Democrats would agree to such a deal.

The letter is intended as a follow-up to a letter McConnell and Sen. Chuck Grassley (R-Iowa) sent Reid and Finance Committee Chairman Max Baucus (D-Mont.) on Tuesday. That letter pressed Democrats for action on a tax break/AMT package before Congress takes its next recess in August.

In his Tuesday letter, McConnell avoided the question of offsets and said the Senate hasn’t insisted on them. In response, Reid’s office said just the opposite: The Senate, and the House, has traditionally insisted that any tax-cut proposals be funded by offsets.

National Republican Senatorial Committee Chairman John Ensign (Nev.) had pushed hard last month to extend the expiring energy tax breaks by demanding that they be attached to a housing bill. The move prevented the Senate from voting on the housing legislation last week.