March 1, 1994

A Primer on the Corporate Alternative Minimum Tax

Download Special Report No. 30

Special Report No. 30

Executive Summary A new corporate alternative minimum tax (AMT) was enacted as part of the Tax Reform Act of 1986 (TRA86) to “serve one overriding objective,” according to the House Ways and Means Committee report. That objective was to ensure that profitable corporations would not “avoid significant tax liability by using various exclusions, deductions, and credits” to which they were otherwise entitled. Thus, the AMT was consistent with the general thrust of TRA86 to broaden the base of the personal and corporate income tax systems while lowering tax rates. Unfortunately, the other main theme of TRA86, simplification, was partly sacrificed in the process.

The Economic Recovery Tax Act of 1981 (ERTA) planted the seeds for the AMT by allowing corporations to reduce current taxes paid in years with, for example, large capital investments. However, Congress began to reassess the pro-capital investment philosophy of ERTA, particularly in response to publicity focusing on some major U. S. corporations paying little tax vet reporting significant “book” income. The AMT was enacted to ensure that these corporations pay some minimum level of current taxes.

This objective of the corporate AMT has been achieved: Tax collections from many corporations have significantly increased and collections are more evenly distributed among firms and among industries. In 1991, 30,400 corporations had AMT liabilities totaling $5.3 billion. The National Association of Manufacturers claims that the AMT has become “the primary tax system” for some major industries, such as the automotive, steel, and mining industries.

Unfortunately, the effect of the AMT goes beyond simply increasing taxes on corporations. The AMT is a disincentive to investment, hits companies particularly hard during economic slowdowns when they can least afford it, and adds substantial complexity to the tax system. The Omnibus Budget Reconciliation Act of 1993 (OBRA93) contained modifications to the AMT which should alleviate some of these problems and investment disincentives. However, the tax continues to be controversial because its significant economic and compliance costs may exceed any intended policy gains.