Long-Term Solution Needed For AMT Reform

November 27, 2006

Reforming the alternative minimum tax will almost certainly be on the agenda in the new Congress. Republicans have long supported raising the AMT minimums and key Democrats, such as incoming House Ways and Means chairman Charles Rangel (D-NY), have voiced their intention of addressing the AMT.

Two articles today illustrate the effect of ignoring AMT reform and the hurdles the new Congress will have to overcome.

The Des Moines Register:

An exemption that limits the number of high-income taxpayers in Iowa and elsewhere who pay the alternative minimum tax expires at the end of this year.

That means an estimated 19.2 million additional taxpayers across the United States will lose all or part of their deductions for mortgage interest and local property taxes – and increase their income tax bills by an average of about $2,390.

These taxpayers also will lose all or part of the benefit of the lower 15 percent tax rates on stock dividends and capital gains that were enacted by Congress as part of President Bush’s tax cuts.

Altogether, it will add up to a $45.9 billion increase in taxes, according to an estimate by the nonpartisan congressional Joint Committee on Taxes.

The San Francisco Chronicle:

Clearly, the tax will be an early test of Speaker-elect Nancy Pelosi, D-San Francisco, who has pledged as a first order of business to impose a straitjacket on the budget to halt years of GOP deficit spending.

Pelosi has promised within the first 100 hours of her leadership to impose a pay-as-you-go spending rule, which requires that any new tax cuts or spending increases be offset by spending cuts or tax increases elsewhere.

The so-called pay-go rule is important to conservative Democrats whose critical inroads into Republican-leaning districts led their party to its huge victory Nov. 7. These Democrats may hold the balance of power in the new Congress, and they campaigned on restoring fiscal responsibility.

But if Democrats impose the pay-go rule, they cannot fix the alternative minimum tax without gutting existing spending programs — much less creating new ones — or sharply raising other taxes.

The following charts from the Tax Foundation show the reach of the AMT (Full article on AMT):

Projected Impact of the Individual Alternative Minimum Tax

Number of Tax Returns Affected by the Alternative Minimum Tax as a Percentage of All Tax Returns, by State, 2003

Number of Tax Returns Affected by the Alternative Minimum Tax as a Percentage of Tax Returns With Positive Tax Liability, by State, 2003

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