Harry Reid

There is bipartisan support in Congress for ensuring that more taxpayers aren’t hit with the alternative minimum tax (AMT) in 2007. Democrats pushed a bill through the House on Nov. 9 that would shield 21 million people from the AMT for one year. But Republicans opposed the bill and President Bush has threatened a veto because the measure offsets the cost of the AMT fix by raising a tax on hedge-fund managers’ income.

The AMT issue is important to the many small construction firms classified as partnerships, or “S Corporations,” which pay taxes at individual, not corporate, rates. Carin Narcesian, Associated Builders and Contractors’ director of legislative affairs, says her group’s members “are small-business owners, and they’re getting hit very hard by the AMT.”

The House-passed bill, sponsored by Ways and Means Committee Chairman Charles Rangel (D-N.Y.), would pay for the one-year AMT “patch” by requiring hedge fund managers to pay taxes on some income at individual rates, not the lower capital-gains rate as they do now.

"Senate Majority Leader Harry Reid has postponed action on the bill until early December because he lacks support to override a veto."

But GOP lawmakers say they want a “clean” bill that simply patches the AMT for one year without an offsetting tax increase. House Minority Leader John Boehner (R-Ohio) blasts the measure for including “job-killing tax hikes on entrepreneurs and risk-takers who invest and create family-wage jobs for working families.”

The House’s AMT patch bill has another provision of keen interest to the construction industry: a one-year delay of a requirement that government agencies withhold 3% of the value of contracts they award. That mandate now is slated to take effect at the end of 2010.

The Associated General Contractors strongly supports the one-year delay and wants to see the Senate adopt it, says Heidi Blumenthal, director of tax and fiscal affairs. “Just to get the Senate on record, supporting a provision, would really be great,” she says. But ABC would prefer to see Congress repeal the 3% withholding requirement permanently. Narcesian says that she sees little benefit in “kicking the can down the road” for another year.

The focus now is on the Senate, where Majority Leader Harry Reid (D-Nev.), without the 60 votes needed to override the threatened veto, has postponed action on the bill until after Thanksgiving. Treasury Secretary Henry M. Paulson warns that Congress must pass an AMT patch soon “to avoid confusion and delays for taxpayers.”

Rangel also proposed a $1.3-otrillion tax package, which includes permanent AMT repeal. Construction groups like that provision but don’t support the overall bill. It would cut the top marginal corporate rate from 35% to 30.5%, but hike the amount an S Corp. pays in payroll taxes. That basically pits firms taxed at corporate rates against S Corporations, Blumenthal says. “You’re really taking the tax off of one business and putting it on another,” she notes.