Congress Had Two Key Lessons in 2005

For conservative lawmakers taking stock of the 2005 legislative year, two important lessons stand out. Whether they learn from them could determine the extent of their successes in 2006.

Lesson No. 1: Some of the staunchest liberals in Congress appear desperate to secure either the outright repeal or a temporary mitigation of the Alternative Minimum Tax (AMT).

Created in 1969, the AMT was designed to extract tax payments from a miniscule number of millionaires (then a mere 155) whose aggressive use of tax deductions and other legal techniques to shelter income erased their entire tax liability. Overwrought class warriors of that era enacted a seemingly innocuous and limited scheme that has morphed 35 years later into a tax code version of Frankenstein’s monster.

The AMT requires taxpayers who have already calculated their tax liability on their 1040 Forms to enter a parallel Kafkaesque tax universe that often hits them with thousands of dollars in unanticipated tax liability. The AMT’s reach has exploded in recent years largely because its rate brackets and exemption amounts do not automatically adjust for inflation. Thanks to its unforgiving 26 and 28 percent income tax rates and its disallowance of many common deductions, such as those for state and local taxes, personal exemptions, and the children’s tax credit, the AMT now ensnares 3.8 million unwitting victims, who in 2004 paid on average an additional $6,000.

If current law remains unchanged, the number of AMT victims will skyrocket, reaching 21.6 million next year, most of whom would hail from decidedly middle-class backgrounds. According to the Treasury Department, three in four taxpayers with incomes between $100,000 and $200,000 would be paying the AMT, as would one-third of all those earning between $50,000 and $100,000. The hardest hit? Taxpayers in the so-called Blue States.

Take the New York City metropolitan area. Fully 6% of taxpayers in New York already pay the AMT, as do 5.9% of those in New Jersey and 4.8% in Connecticut. Add in 4.5% of Californians and approximately 4% of taxpayers in other high-tax jurisdictions such as Massachusetts and Maryland, and you have what The Wall Street Journal dubbed “a liberal tax that now hits liberal states especially hard.”

In contrast, only 1 percent or so of taxpayers in Red States such as Alabama, Mississippi, Tennessee, Texas, Indiana, the Dakotas, West Virginia and Oklahoma fall into the AMT trap.

Not surprisingly, reining in the AMT has risen to the top of the agenda for enough Blue State liberals to intrigue Senate Republican leaders. New York’s liberal duo of Chuck Schumer and Hillary Clinton voted for last fall’s tax reduction package in large part because it contained a one-year $33.4 billion “patch” of current AMT levels. California’s Dianne Feinstein agreed, asserting that “middle class Californians are being hurt” by the AMT.

But how deep do these passions run among Senate Democrats? Would they, for example, vote for a broader AMT “fix” if it were linked to other pro-growth tax reforms, such as making repeal of the death tax or the 15 percent rate for capital gains and dividends permanent? If so, the ever-present threat of a filibuster would evaporate and 2006 could be a breakthrough year for pro-growth tax reforms.

Lesson No. 2: The end-of-session theatrics surrounding the effort to open up the Artic National Wildlife Reserve (ANWR) to oil and natural gas drilling made one thing abundantly clear: No controversial legislation can survive this intensely partisan Senate absent the procedural protections afforded by the budget-reconciliation process.

Bills that reconcile the spending levels in current law with the targets set forth in each year’s budget resolution have one very special privilege — they require only a simple majority to pass, rather than the 60 votes needed to break a filibuster. The difference between 60 and 51 votes most often is the difference between success and failure.

In fashioning last year’s budget resolution, Senate Republicans initially thought that simply inserting the ANWR drilling provision into a reconciliation bill would guarantee its passage. But wavering Democratic senators scoured the reconciliation bill and found many excuses to oppose it — minor trims to Medicaid, Food Stamps and student loans, for example.

Strategists now believe that the authorization to drill in the barren ANWR wasteland can pass in 2006, but only if it is isolated in an ANWR-only reconciliation bill.

The allure of playing the reconciliation card to uncork stalled legislation has prompted Senate conservatives to ponder how best to design the budget resolution for the coming year to advance a host of other conservative legislative priorities.