Dec. 7 (Bloomberg) -- Congress moved closer to protecting 23 million households from the alternative minimum tax as Senate Democrats dropped a demand to link it to a tax increase on executives at private equity firms and hedge funds.

The Senate approved a one-year, stop-gap measure that temporarily indexes the minimum tax for inflation, sparing 23 million American households from an average tax increase of $2,000 this year.

The 88-5 vote yesterday puts pressure on the House to abandon its own legislation that links the minimum tax relief, aimed at middle-class families, to higher taxes on executives of hedge funds, buyout firms, as well as real estate and other partnerships.

Senate Majority Leader Harry Reid said House Democrats would accept the Senate action. The tax relief will cost the government $51 billion without any offset from higher taxes or reduced spending.

In the House, where Democrats this year reinstated so- called pay-as-you-go rules that require lawmakers to offset any new spending or tax cuts, Democratic leaders said they would pay for the tax fix, though payment doesn't have to come right away.

``Paygo does not necessarily require instantaneous offsets,'' said Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee.

The paygo requirement can be fulfilled over five years, said House Majority Leader Steny Hoyer of Maryland.

Rangel Comments

House Ways and Means Committee Chairman Charles Rangel, a New York Democrat, said yesterday said he wouldn't oppose removing a provision that would boost the tax on carried interest, the performance fees that managers of private equity firms, hedge funds and some real estate and oil and gas partnerships earn.

``Relief is going to be there, and it is going to be paid for,'' he said in an interview today.

Senate Republican leader Mitch McConnell of Kentucky said House Democrats must agree to the ``common sense solution'' or ```explain to taxpayers why they will further delay tax refunds for millions of Americans.''

Robert Carroll, Treasury's deputy assistant secretary for tax analysis, said yesterday that if the AMT patch doesn't pass until Dec. 21, refunds worth about $40 billion to as many as 17 million taxpayers will be delayed.

14 Votes Short

The Senate vote yesterday to approve the alternative minimum tax relief came hours after Senate Republicans refused to begin debate on the House version. That vote fell 14 votes short of the 60 necessary to proceed. Republicans objected to the proposed tax increase on private equity executives in the House measure.

The White House thanked the Senate in a statement for passing the minimum tax bill without the revenue offset, the result the president has advocated.

``We encourage the House of Representatives to swiftly pass this bill to stop this tax increase, and to prevent a costly delay in refunds,'' the statement said.

The minimum tax was created in 1969 to prevent 155 wealthy Americans from eliminating tax liabilities by claiming excessive deductions, credits and exemptions. The tax works by replacing common deductions such as those for medical expenses and state and local taxes with a flat exemption when the itemized deductions become too large relative to income. Amounts over the exemption are taxed at either 26 percent or 28 percent, depending on income.

Because the exemption was never indexed for inflation, the levy has ensnared an ever-growing number of Americans as incomes rose and the value of deductions increased.

Congress has held the number of affected households at about 4 million over the past decade with a series of temporary fixes indexing the exemption for inflation. The legislation passed by the Senate would set it at $66,250 for joint filers and $44,350 for individuals.

To contact the reporter on this story: Ryan J. Donmoyer at rdonmoyer@bloomberg.net

Last Updated: December 7, 2007 14:05 EST