The House on Wednesday passed by 414 to 4 a bill that extends the higher AMT exemption amounts for another year. See this story in the LA Times. The main beneficiaries of the AMT stop-gap legislation will be taxpayers earning between $200,000 and $500,000. They make up part of the same group that will benefit most from the capital gains and dividends rate cut. But without hte extension, considerably more taxpayers in the $75,000 to $100,000 range would also be subject to the tax--increasing from about 1% this year to about 30%. Id.
The House hopes to take up the rest of its tax cuts later--including the costly capital gains and dividends cuts that will provide an additional windfall for the wealthy. Stategists had apparently finally realized that it would not go over well at all if Congress passed the tax cut for the superwealthy without even taking care of the AMT hit on the upper-middle class. Remember that this pressure for the extension of the dividend tax cut comes in the wake of reports that the policy change didn't do much at all to boost economic growth. Karen Richardson, Did the Dividend-Tax Cut Work?, Wall St. J., Dec. 6, 2005, at C5.
The House also voted separately on a set of tax incentives designed to help businesses in the Gulf area hurt by Katrina and Rita. The House bill, unlike the Senate bill, excludes businesses that social conservatives don't like--casinos, liquor stores, massage parlors, and similar businesses.
I have said before that the use of "opportunity zone" credits and other incentives seems like the wrong way to provide federal aid to the areas devastated by the hurricanes. It seems to make common sense that if money were provided directly to residents on the basis of need and they were able to hire local companies directly to rebuild their homes and clean their businesses, the results would be more localized to the area of need. More local business would get contracts, and more local residents would have jobs. The money would circulate in the area, prompting other businesses, like groceries and hardware and clothing stores, to expand.
Our experience with FEMA contracting, on the other hand, suggests that no-bid processes and use of familiar contractors results in most money going to companies far removed from the disaster area. Of the $3.7 billion in FEMA contracts awarded by late November, only $201 million were for Louisiana companies. See this story. Many of those have been no-bid contracts. Id. Some of them went to politically connected companies. See this story (wife of Mississippi Governor Haley Barbour's nephew runs company that is 7th out of 88 MIssissippi companies in magnitude of federal contract dollars received, some of them on no-bid basis).
If tax incentives are to be used as the means for aiding the Gulf area, it is hard to see how Congress can justify providing benefits to some legal businesses and not to others. The discrimination among businesses would have a harsh effect on the owners and employees of the disfavored categories. The basis of discrimination would not be legality, but this particular Congress' views of moral preferences. Even Republicans such as Thad Cochran from Mississippi have stated that no legal business should be excluded from the Katrina tax breaks. To say the least, it will be interesting to see the outcome of a conference negotiation between the Senate and House on these provisions.
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