The chairman of the House Ways and Means Committee has proposed legislation that would effectively halt some current tax audits of people who get a tax break for living and operating a business in the United States Virgin Islands. Many beneficiaries of the tax break are campaign contributors to the lawmaker, Representative Charles B. Rangel, Democrat of New York, according to data collected by CQ MoneyLine, which tracks political contributions. At least one of them, Richard G. Vento, is currently under audit, according to court filings. Mr. Vento gave $4,400 last year to the Baucus-Rangel Leadership Fund, which supports Mr. Rangel and Senator Max Baucus, the Montana Democrat who heads the Senate Finance Committee.
Amazingly, Rangel’s bill would protect the same wealthy businessmen Democrats have been railing against for years: those who move their corporate headquarters offshore just to evade US taxes:
The Virgin Islands tax break–an effective federal tax rate of only 3.5 percent on income earned in the islands–is tied to a program to encourage economic development there. It has existed since the 1960s, but it gained momentum over the last decade as the Virgin Islands government opened the program to services companies in an effort to attract educated, affluent workers. Financial services companies and their executives began flocking to the islands, taking steps like contributing to local charities as ways of establishing residency, which was required to capitalize on the program’s tax benefits. The IRS became suspicious that many were spending more time running their businesses on the mainland than in the islands, and in 2003 it undertook enforcement efforts that, lawyers in the islands say, have ensnared some 100 taxpayers, not all wealthy.
It’s no surprise that campaign contributions have deeply influenced the development of this bill. The Washington Post reported yesterday on the donation of hundreds of thousands of dollars to Democratic leaders and campaign committees, and how those donations were followed by policy shifts in favor of the donors. The bill is also running into serious political problems: House Democrats are starting to realize that a vote for Rangel’s proposal could cost them their seats. As we’ve covered before, the tax increases in Rangel’s bill are very unlikely to survive the Senate. Democrats in swing seats rightfully wonder whether there’s any reason to go on the record for tax increases that won’t even pass the Senate. Congress Daily reports on the dissension among Democrats:
With some vulnerable Democrats facing a difficult tax vote this week, House Democratic Caucus Chairman Rahm Emanuel of Illinois has raised the prospect of taking up the alternative minimum tax patch without provisions that would raise other taxes to make up for the lost revenues. Caucus sources said Tuesday that Emanuel made his case for breaking up Ways and Means Chairman Rangel’s AMT/tax extenders bill in a recent memo to Speaker Pelosi. Aides who have seen the memo said that while it also mentions potentially moving an extenders-only option or proceeding with the package as is, it is clear that Emanuel prefers a stand-alone AMT fix that does not tax profits, in the form of carried interest, from private equity, hedge fund, venture capital and real estate investments, as Rangel’s bill would do… “Why should House members have to walk the plank?” asked Rep. Jim Cooper, D-Tenn. “This is a 130-percent tax increase, and we know it’s going nowhere in the Senate.” Emanuel has dual interests in the measure; in addition to leading Democratic efforts to keep control of the House in 2008, he is a former investment banker. “He is making a political argument for the most point,” said one Democratic aide who has read the memo. “He’s trying to come up with the best possible scenario for Democrats.”
One reason that House Democrats are unlikely to take Emanuel’s advice: He’s de facto advocating the GOP position. Republicans argue that since the AMT was never intended to gather so much revenue, fixing it is not a loss of revenue to the government. The Treasury never expected to receive the money. That being the case, why raise taxes to keep the government whole; better to fix the AMT and leave the taxpayer whole. But that position is unlikely to win the day–not when big-government see the chance to raise a tax 130 percent.
