Helicopter Association International (HAI) continues to closely follow legislative attempts in Washington to address the impact of the alternative minimum tax (AMT) upon the middle class.  Congressman Charles Rangel (D-New York), Chairman of the House Ways and Means Committee has said he wants to write “one gargantuan tax bill,” but it remains to be seen whether hearings held this week will lead to a significant tax package this fall.

Panel witnesses appearing this week before the Ways and Means Committee agreed that the tax cuts championed by President Bush were not the cause of growing income inequality in the United States.  However, a senior fellow for the Brookings Institute said those cuts exacerbated the income gap.

Democrats on the House Ways and Means Committee are in the process of deciding which tax changes to advance this fall, but their list may not reflect what the Senate will endorse or President Bush will sign.  Eagerness on the part of House Democrats to overhaul the alternative minimum tax (AMT) and increase taxes paid by investment managers has not reversed skepticism in the U.S. Senate, making big changes unlikely this year.

House Democrats have outlined a plan to change the AMT tax, which will hit 23 million Americans, up from four million this year, if Congress does not act.  The tax, initially targeted at top earners, is not indexed for inflation and is now hitting upper-middle class taxpayers who have high local tax bills and several children.

House Democrats want to make permanent changes to the AMT this year that go beyond the temporary “patches” that Congress has used to blunt the tax’s impact for the past few years.  They plan to adhere to their pay as you go rules, balancing tax cuts with tax increases.  Repealing the AMT would cost $872 billion over 11 years.  Under their proposal, couples earning less than $250,000 would no longer pay the AMT, and those earnings more than that would most likely bear the cost of that change.  Tax writers have not proposed specific income cutoffs and new rates.

Democrats have also said their legislation would expand the earned income tax credit, the child tax credit, and the standard deduction, all benefiting middle income workers.  Changes have also been proposed in taxation of “carried interest,” one method by which managers of private equity firms are compensated.  Those managers receive some income as a share of the profits of their investors’ stake, money taxed at capital gains rates of up to 15 percent.  Legislation (H.R. 2834) has been introduced by Congressman Sander M. Levin (D-Michigan) that would treat carried interest as ordinary income with a top tax rate of 35 percent.

The expensive AMT and carried interest proposals face difficulty in the U.S. Senate, where opponents are again likely to attack them as tax increases and where it may take more than a simple majority to pass tax legislation.  The Chairman of the Senate Finance Committee, Max Baucus (D-Montana) expects 2007 to end with another AMT patch, which carries a $50 billion cost.