Senate Republicans are demanding the extension of President Bush’s signature tax cuts before they cooperate on hemming in another tax that they contend affects mostly “blue state” voters living along the coasts.   

At issue is the Alternative Minimum Tax (AMT), which will hit an additional 20 million taxpayers next April unless Congress takes action. The problem for Democrats is that they will need Republican support to shield people from the tax, and Republicans are signaling they will have to pay a price.

Under pay-go rules, Democrats would have to pay for a one-year AMT patch, which would cost $55 billion.
This has fueled speculation that Democrats will override pay-go rules to pass the AMT fix. However, Democrats need 60 votes to get around the budget rules.

Lott said there are “more than the necessary votes” in his conference to stop Democrats from reaching the 60 votes necessary to waive pay-go rules.

 “I’m happy to waive pay-go as long as we’re consistent and we do it for some other things that affect even more taxpayers,” said Sen. Jon Kyl (Ariz.), who heads the Senate Republican Conference.

Kyl said Republicans would ask for the extension of cuts on marginal rates, capital gains and dividends as well as estate tax relief as a price for cooperating on the AMT patch.

The GOP strategy sets up a high-stakes game that Republicans hope will result in the extension of at least one of the Bush tax cuts. Because of the budget rules, Republicans can hold the AMT patch hostage to their demands without actually filibustering a tax cut that they would be loath to oppose.

But the strategy is risky because Congress must act quickly if it wants to shield people from the creeping tax and also avoid mass delays of taxpayer refunds by the IRS. By demanding extensions of controversial tax cuts, the Republicans could be blamed for standing in the way of tax relief.

Democrats jumped on this point on Tuesday. “If the Republicans want to hold up tax relief for 19 million Americans in order to help people who don’t need the relief, that’s their choice,” Jim Manley, a spokesman for Senate Majority Leader Harry Reid (D-Nev.) told The Hill.

Though big numbers of Republicans pay the AMT, its victims are concentrated in states that vote Democratic. Last year, more than 35 percent of filers in Connecticut, New York and New Jersey, where both senators are Democrats, paid the tax.

Republicans and Democrats agree that the AMT has to be fixed, but they differ on how to rein in the creeping tax, which was originally designed to ensure that the wealthy paid enough in taxes, but is engulfing the middle class because it was never indexed to inflation. Repealing the AMT could drain as much as $1 trillion in revenue from the Treasury over 10 years.

Patching the AMT for one year would cost about $55 billion. By comparison, it would cost roughly the same amount to extend the Bush tax cuts on capital gains and dividends for two years, extend the cuts on middle and upper income earners for a year or extend estate tax relief for a year.

“A deal could be made, there’s no question. It’s mechanically doable,” a Republican tax aide said.

Speaking to reporters on Tuesday, the ranking members of the Senate and House tax-writing committees, Sen. Chuck Grassley (R-Iowa) and Rep. Jim McCrery (R-La.), urged Democrats to patch the AMT immediately without attaching any offsets.  

Grassley cited a letter to congressional Republicans from Treasury Secretary Henry Paulson urging Congress to patch the AMT by early November to avoid holding up $75 billion in tax refunds and hitting 25 million taxpayers each with a roughly $2,000 tax increase next spring.

He also said that there was a “posture” among Senate Republicans to press for extensions of the Bush tax cuts in exchange for Republican support on waiving pay-go. He also opined that Sen. Max Baucus (Mont.), the moderate Democrat who chairs the Finance Committee and works closely with Grassley, was amendable to such a negotiation. “I think he’d be open to our helping him overcome the [pay-go] problem,” Grassley said.

Asked whether Republicans were in danger of appearing obstructionist, McCrery retorted that the minority didn’t run the show: “Republicans are not in charge of Congress, Democrats are in charge of Congress.”

Republican staffers have reached out to the business lobby to gauge their support for the AMT strategy and probe which tax cut they’re likely to get behind.

“We’ve been asked, ‘Which of the tax cuts that would otherwise expire would have the greatest impact on the economy?’ ” said Jade West, the president of the Tax Relief Coalition, which was instrumental in the grassroots campaign that led to the original passage of the Bush tax cuts.

Republicans have been mulling whether to drive a hard bargain with Democrats on the AMT for some time. The notion was raised, among several items, at a meeting Kyl held with K street lobbyists months ago.

West, who worked closely with Senate Republicans for years at the Senate GOP Steering Committee, argued the Republican strategy was “completely rational.” She summed up their position by saying that Republicans want a tax cut without paying for it in return for letting Democrats have a tax cut without paying for it.