Outlook: House Democrats are expected this fall to try to repeal the much-criticized alternative minimum tax (AMT) — and to find a way to replace hundreds of billions of dollars in lost revenue that would result. But getting a bill through the Senate and signed into law is expected to be extraordinarily difficult. As a consequence, lawmakers are more likely to approve a temporary change, as they have done repeatedly in recent years, to prevent the minimum tax from raising the levy on about 19 million middle-income taxpayers.

Synopsis: Congress created the AMT in 1969 to prevent the wealthiest few from using legal deductions and credits to eliminate their tax liability. But the income threshold for the minimum tax has never been indexed to rise with inflation. So, what was considered to be upper-income decades ago is now closer to the middle, and the tax now falls on millions of people who were never supposed to pay it.

For the past few years, Congress has limited the reach of the AMT by passing annual “patches” that temporarily raised the income threshold. However, with the expiration of the most recent patch at the end of last year, an estimated 23 million taxpayers will owe the minimum tax for 2007, up from about 4 million in 2006.

This parallel income tax system most often touches families with several children who live in such high-tax states as New York, New Jersey and California, because it limits the use of personal exemptions and does not allow people to deduct state and local taxes. House Democrats — led by Charles B. Rangel of New York, chairman of the Ways and Means Committee, and Richard E. Neal of Massachusetts, who heads the panel’s tax-writing subcommittee — see 2007 as the right time to repeal the AMT. Although they have not yet introduced a bill, they have outlined the core principles they want to achieve: No couple making less than $250,000 would have to pay the AMT, and a repeal would be paired with expansions of tax benefits for middle- and lower-income Americans, including enhancements of the standard deduction, the earned income tax credit and the child credit.

Repealing the minimum tax outright would cost an estimated $872 billion over 11 years, and Democrats expect most of the revenue needed to offset the loss and comply with pay-as-you-go budget rules to come from the top of the income scale. It is unclear, however, how they plan to structure the revenue increases.

Rangel and Neal are expected to start with a hearing in early September and move the issue to the House floor sometime in the fall, perhaps packaged with other tax proposals. Before the August recess, conservative Blue Dog Democrats endorsed a permanent solution to the AMT, indicating that the majority may be able to assemble the votes for House passage.

But moving further may be tough politically. Because Congress has shielded so many taxpayers from the AMT through yearly patches, many of those who would be subject to the tax in the future and would benefit from a repeal may not realize that they are being helped.

Moreover, although Senate Finance Chairman Max Baucus, D-Mont., and ranking Republican Charles E. Grassley of Iowa have proposed eliminating the AMT, they are much less enthusiastic about offsetting the revenue loss with tax increases elsewhere. Grassley argues that pay-as-you-go rules should not apply to the AMT because Congress never intended for the tax to reach deep into the middle class and generate large receipts. Baucus has said that he expects the year’s wrangling to result in another patch. The later it gets in the year, the more likely that becomes.

Legislative action: Only hearings so far.

Related Stories: Democrats’ AMT plans, CQ Weekly, p. 1506.