McCrery signals support for tax extenders offset

Chances of a bipartisan deal to at least partially offset a package of popular tax breaks got a lift Wednesday after a key House Republican offered support for a Democratic measure disallowing tax deferrals by hedge fund managers into offshore tax havens.

“I think it’s a legitimate distinction from general deferral that we ought to look at,” Ways and Means Committee ranking member Jim McCrery (R-La.) told reporters at a National Press Club breakfast.

{mosads}A deadlock in the Senate over whether to offset the full cost of extending the tax breaks is stalling must-pass legislation that would shield millions of taxpayers from the Alternative Minimum Tax (AMT) for one year.

Senate Republicans already forced Democrats to agree to a “clean” one-year AMT patch with no pay-fors. They are now balking at offsetting the so-called “extenders” by arguing that new taxes shouldn’t be used to pay for the renewal of existing tax relief.

But McCrery’s endorsement of the hedge fund measure signals that some Republicans may support the tax change on its merits, opening the door for a deal on offsets with Democrats.

McCrery echoed Republican complaints that Democrats’ pay-as-you-go budget rules, as the majority administers them, would lead to huge tax increases over time. “The pattern is that they are paying for temporary tax cuts with permanent tax increases,” he said.

But he acknowledged that Republicans, when they were in the majority, partially offset extenders with permanent tax increases on at least one occasion.

“I think we did. But when we did so, it was with policy changes that we thought were warranted,” he said.

He also judged the odds of Congress passing an extenders package this year as “less than 50-50,” because he said Democrats waited too long to hatch a compromise with Republicans. He predicted they would pass only a clean one-year AMT patch before adjourning.

On Thursday, the Senate will vote on whether to end debate on the House-passed extension of AMT relief and the expiring tax breaks.

The vote is almost certain to fail because the $81 billion measure is fully offset with tax increases, including one measure that raises taxes on hedge fund and other investment managers that has been criticized even by some Senate Democrats. It is strongly opposed by Republicans.

The provision barring offshore deferrals by hedge fund managers would raise nearly $24 billion over a decade. Sen. John Kerry (D-Mass.) and Rep. Rahm Emanuel (D-Ill.) introduced it as a separate bill earlier this year.

The measure was the only House-passed pay-for that survived in a plan floated earlier this week by Senate Finance Committee Chairman Max Baucus (D-Mont.) proposing a clean AMT patch and a two-year, fully-offset extender package, according to GOP Senate aides.

Extending the tax breaks for two years would cost roughly $45 billion.

The Baucus proposal also includes two pay-fors not vetted by the House that could prove more controversial — one to limit the ability of businesses to offset prior years’ tax liabilities and one that would raise taxes on private equity firms that go public. The latter was introduced by Baucus and Sen. Chuck Grassley (R-Iowa), the Finance Committee’s ranking member.

The Republican leadership has signaled that many of its members would reject on principle any tax increases to pay for the expiring provisions.

“The effort to … pay for the AMT [fix] is highly offensive to those on my side of the aisle,” Senate Minority Leader Mitch McConnell (R-Ky.) intoned on the Senate floor on Wednesday. “Why should we raise taxes on some other Americans in order to patch the AMT and pass the extenders?”

On Tuesday, McConnell proposed a plan whereby Democrats would allow a vote on a GOP substitute for the House-passed bill that would presumably carry no offsets. Democrats would be allowed to amend the bill, such that any tax increases they propose would have to meet a 60-vote threshold.

Republicans also want to hold a vote on amendments to repeal the AMT permanently and extend the Bush tax cuts on marginal rates, capital gains and dividends.

Grassley, however, has signaled he is open to paying for at least some of the cost of the extenders, although he is adamant that a repeal or one-year patch of the AMT not be offset.

On the extenders, he has said he would base his decision on the merits of specific offsets, independent of their ability to raise revenue, according to a senior Senate tax aide: “The substance of some of the offsets, like the reform of offshore deferred compensation for hedge fund managers, may be something he could support.”

However, the Iowa Republican is concerned about the procedural risks of offsetting the extender package, the aide said. If the Senate approved $45 billion in extenders and sent the legislation to the House, then the House might send back only the AMT patch with the offsets.

“This is a very real concern. It is real enough that, unless he can be convinced otherwise, Sen. Grassley will not support offsets on a combined AMT/extenders bill,” the aide said.