As the reach of the Alternative Minimum Tax (AMT)The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than the ordinary system. grows, pressure on Congress for reform continues to build.
The AMT—a second income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. that’s parallel to the regular income tax—was designed to make sure wealthy taxpayers didn’t get away with paying no tax. But thanks to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. it’s hitting more less-than-wealthy Americans every year. And since the AMT doesn’t allow deductions of state and local income taxes like the regular federal income tax, taxpayers are beginning to complain to state and local governments. (For an excellent overview of the AMT, see the U.S. Treasury’s recent AMT fact sheet).
As the AMT’s reach grows, disgruntled taxpayers may start blaming their state and local governments, as well as the feds, for their predicament. If that happens, don’t be surprised if you see popular state governors arousing their citizens to fight for repeal of the tax invented by nerdy guys with thick glasses and green eyeshades.
According to the U.S. Treasury, 3.8 million taxpayers will be hit with the AMT this year. Here’s a map showing which states have the most AMT filers as a percentage of total returns filed (top 10 states colored blue):
Figure 1. Percentage of Total Tax Returns Affected by the Alternative Minimum Tax by State, 2003
However, perhaps a more instructive figure is the percentage of taxpayers who have a positive tax liability that are hit with the AMT. The above map divides the total number of AMT payers by the roughly 131 million tax returns filed in 2003. However, more than 40 million of those taxfilers paid zero income tax, as they’ve been thrown completely out of the income tax base thanks to various credits and deductions. The map below shows the percentage of those who actually pay some income tax in each state who are hit by the AMT:
Figure 2. Percentage of Tax Returns With Positive Tax Liability Affected by the Alternative Minimum Tax by State, 2003