House halts tax hike, but Dems feud over how to cover shortfall

The San Francisco Chronicle reports:

House Democrats plunged Friday toward a collision between two of their most pressing political needs: to show fiscal responsibility and to stop a huge tax increase on 23 million middle- to upper-income taxpayers concentrated in Democratic strongholds like the Bay Area.

The House narrowly passed, 216-193, an $80 billion bill that would halt for one year the spread of the alternative minimum tax - known as the AMT - along with other provisions to help low-income people and extend a research and development credit for business.

Left alone, the alternative minimum tax could strike Bay Area households earning more than $100,000 this year. That threshold could drop to about $75,000 or less depending on the number of children in a family and the amount of the family's property taxes, mortgage interest and other deductions.

Rep. Ellen Tauscher, D-Walnut Creek, said the tax now hits 21,000 households in her 10th District, which covers parts of Contra Costa, Alameda, Solano and Sacramento counties. Come April, 92,000 households could pay thousands of dollars in higher taxes imposed by the alternative minimum tax if nothing is done.

"We have 23 million people at a grade crossing thinking there's no train coming, and they're going to start walking across in April and they're going to get whacked," Tauscher said.

That story is repeated in every Bay Area congressional district, where popular middle-class deductions for such things as high local and state taxes and costly mortgages would be wiped out under a tax that Congress created in 1969 to nab 155 high-income people who had escaped income taxes. But Congress never indexed the alternative minimum tax for inflation, and it has hit greater and greater numbers of taxpayers every year.

To plug the bill's $80 billion in projected lost revenue, House Democrats raised taxes on venture capitalists, hedge funds and other investment funds. Senate Democrats hate the idea, setting up a clash even as time is running out for fixes to be made for the current year.