In the coming weeks, Congress will come to grips with what is arguably the most important tax issue of the year, the Alternative Minimum Tax (AMT). In the very near future, House Ways and Means Committee Chair Charles Rangel (D-NY) will propose a "patch" to avoid a steep increase in the number of taxpayers liable under the AMT, as well as what he calls "the mother of all tax bills" — his long-awaited measure to repeal the AMT. In the Senate, the picture is more muddled amid rancorous debates in the Finance Committee, where AMT legislation presents the biggest challenge yet to the pay-as-you-go (PAYGO) principles adopted by Congress early this year. When the 110th Congress opened in January, Rangel made clear that repealing the AMT was his top priority — he initially aimed to release his proposal in May but has yet to do so. Indeed, the almost universal sentiment in Congress is that the AMT should be indexed, overhauled or repealed at some point, as Rangel would like to do. But delays and lack of consensus on what an overhaul would consist of or how to offset the huge costs of repeal have stalled action. The AMT was originally intended to ensure that the 155 wealthiest Americans — who had taken advantage of deductions and others means to avoid paying income tax entirely — paid their fair share in taxes. The AMT taxed only 20,000 taxpayers when it was adopted in 1969. The number of Americans paying it has skyrocketed in the years since. Because it is not indexed for inflation and its scope was enlarged considerably by the cuts in individual income tax rates from 2001 to 2006, three million taxpayers a year now pay the AMT. The Tax Policy Center estimates that the tax threatens to encompass an additional 19.9 million Americans in 2008, raising their taxes by an average of $3,264 annually. If the Bush tax cuts expire as scheduled at the end of 2010, 39 million taxpayers (roughly 35 percent) will be hit by the AMT in 2017. If the tax cuts are extended, the number jumps to 53 million taxpayers (close to 50 percent). Efforts to keep that from happening and to limit the tax to the three million who paid it in 2006 via a one-year patch would cost an estimated $55 billion in lost revenue. Operating under restored PAYGO rules, which require new mandatory spending or tax cuts to be financed by offsetting spending cuts or tax increases, Congress is at pains to find a way to pay for this cost, much less the vastly greater cost of repealing the AMT entirely. Repeal of the AMT would cost roughly $840 billion over the next ten years in the unlikely event that the Bush tax cuts are allowed to expire; the cost is closer to $1.6 trillion if they are not. Neither of these options for AMT is cheap. On Oct. 17, according to CongressDaily, Senate Finance Committee Chair Max Baucus (D-MT) and other members of the panel discussed the idea of waiving the PAYGO rules for AMT, enraging deficit hawk Sen. Kent Conrad (D-ND), who called the discussion "unbelievably irresponsible." Offsets sufficient to pay even for the relatively modest patch are not in great supply, and almost all of them can be tarred as a tax hike of some sort, complicating PAYGO compliance efforts. $66 billion in offsets already approved this year by the House Ways and Means and the Senate Finance committees for other bills are off the table. Still available and under discussion are closing the capital gains loophole on "carried interest" earned by private equity managers, limiting executive compensation deferral, taxing stock options based on book value, and toughening rules on tax shelters. Of these, only the carried interest option could come anywhere near paying for a one-year patch. Action in Congress on the AMT issue has stalled this year over how, and whether, to achieve PAYGO compliance and the complexities of the Rangel bill. That bill, still not released to the public, is rumored to consist of a permanent, revenue-neutral repeal of the AMT, comprising an increase in the top ordinary individual tax rate, a corporate rate cut, elimination of major corporate deductions, and an expansion of the Earned Income Tax Credit, child tax credit, and other tax breaks for 90 million people. But during the week of Oct. 15, two important developments occurred which could break the stalemate. First, Rangel conceded that time had run out this year for a vote on his broad tax reform package and that he would propose a one-year "patch" of the AMT. And Senate Finance Committee Ranking Member Charles Grassley (R-IA) refined his long-held view that "repeal of the AMT should not be offset because it is … unfair to expect taxpayers to pay a tax they were never intended to pay, and it is even more unfair to expect them to continue paying for that tax once we get rid of it." He reportedly said he "would welcome a compromise that indexed the AMT threshold to protect the vast majority of taxpayers, while raising taxes on the wealthy to defray the budgetary impact," in compliance with PAYGO requirements. But the issue of whether the AMT bill will be offset is not settled. The Senate Finance Committee's heated discussion last week about offsets did not end in consensus. What's more, Baucus may have support from most committee members to waive PAYGO requirements for the $55 billion AMT patch in exchange for offsetting a similarly-sized two-year extension of popular tax credits that expire in 2007. The Committee is scheduled to meet again on Oct. 23. Congress is under pressure to act because the Internal Revenue Service begins printing tax forms in November and says it would need at least six weeks to reprogram its computers to account for any changes in law.