AMT Patch Appears Likely; “Pay For” Is Uncertain

October 17, 2007

What to do about the Alternative Minimum Tax (AMT)? That is the $64,000 question in Washington tax policy circles. The Washington Post has two new stories on the issue. The first is an A.P. story detailing Charlie Rangel’s offering of a one-year patch due to the fact that time is running out to do something before filing season begins in January.

Pressure is building for Congress to protect millions of taxpayers from an automatic tax increase caused by the alternative minimum tax, and the House’s top tax writer promised Wednesday to advance a stopgap bill to stave it off.

Rep. Charles Rangel, D-N.Y., chairman of the tax-writing Ways and Means Commmittee, told reporters that he would advance a one-year “patch” of the alternative minimum tax, originally aimed at a few tax dodgers, but now threatening to hit about 20 million middle-class taxpayers next year if not changed.

At the same time, Rangel said that a more comprehensive and permanent bill to rewrite the alternative minimum tax, or AMT, will probably not face a vote by the full House until next year.

The AMT originally was designed to make sure that the wealthiest couldn’t use tax breaks or deductions to eliminate their entire tax liability. But inflation and recent tax cuts push more and more taxpayers into the grasp of the minimum tax each year, depriving about 4 million tax filers from taking full advantage of various deductions and tax credits.

One thing to note is that the article states that recent tax cuts have pushed more people into AMT. That is true, but it needs to be made clear that nobody is paying more in income taxes currently as a result of these tax cuts, even if they are paying AMT.

But what about the possibility of paying for this patch with tax hikes elsewhere? That has been put on the backburner for now.

Rangel has been working for months on a sweeping tax bill that would fix the AMT by raising taxes on upper income ratepayers, while cutting taxes for married couples and low-income parents and workers.

The idea is that the tax increase on the wealthy would raise enough to both fix the AMT and spread smaller benefits to lower income taxpayers. But its tax increase on the wealthy of about $800 billion over 10 years – a surcharge on incomes over $500,000 or so – has some Democrats nervous, especially those in GOP-leaning districts.

And since the Senate has made it plain that a broader tax bill is a nonstarter in that chamber – and would be vetoed by Bush in any event – Rangel bowed to political reality and announced he would advance the one-year measure, adjusting the AMT and extending expiring provisions such as the research and development tax credit for business.

Rangel is right to pursue fundamental AMT reform in the context of broader tax reform. Surtaxes are not the way to go (even though they are superior to revenue-neutral hikes in the marginal taxable income tax rates). The best option would be to eliminate AMT as part of fundamental tax reform in a way that is similar to that put forth by the President’s Tax Reform Panel in 2005. Unfortunately, due to an unwillingness of leaders in Washington to take on the tough issue, that report appears to be collecting dust on a bookshelf somewhere.

Another Washington Post story delves into the politics of the issue, especially the issue of how to pay for the patch. (Either spending must be cut, other taxes raised, or the deficit be increased.)

For more on the Alternative Minimum Tax, check out our section on the topic here.


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