Fiscal Fact No. 72
As the 110th Congress convenes this month a key issue facing lawmakers is whether to reform—or possibly repeal—the Alternative Minimum 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. (AMT). Although the growing AMT has caused anxiety throughout Congress, not all lawmakers’ congressional districts are equally affected. An analysis of recently released IRS data reveals that some congressional districts are much more heavily affected by AMT expansion than others—suggesting some federal lawmakers have a much stronger incentive to reform the AMT than others.
Background on the Growing AMT
The AMT was originally designed as a backstop for the federal income tax, and affected only a small number of wealthy taxpayers. But its reach has grown in recent years, and it has begun drawing in middle- and upper-middle income taxpayers as well. In 2000 just 1.3 million tax returns were subject to the AMT. If left unreformed, the Joint Committee on Taxation estimates the number of AMT returns will spike to 19 million in 2006, reaching a peak of 29 million in 2010—nearly 20 percent of all tax filers—before tapering off sharply.1 As a result, reforming the AMT has become a key legislative priority for many Members of Congress.
Which Congressional Districts Are Most Affected?
Of the 435 congressional districts and the District of Columbia, Table 1 presents the 20 districts most heavily affected by the AMT in 2004, the most recent year available from the IRS.2 The table presents the percentage of tax returns hit by the AMT, the average AMT tax liability for those returns,3 and the name and political affiliation of the Member of the House of Representatives who represents each district in Congress.
Congressional districts in New York, New Jersey and California dominate the list of areas most affected by the AMT. New York’s 18th congressional district tops the list with 13.5 percent of all tax returns subject to the AMT. Overall, nine New York congressional districts appear in the top 20, while California and New Jersey each have four, and Connecticut, Illinois and Maryland each have one.
Currently, 13 of the 20 most affected congressional districts are represented by the Democratic Party, while seven are represented by the Republican Party. This balance tipped more in favor of the Democratic Party in the most recent congressional elections, as Sue Kelly (R) was unseated by John Hall (D) in the race for New York’s 19th congressional district.
Table 1. Twenty Congressional Districts Most Heavily Affected by the AMT, 20044
|
State |
Congressional District |
Member of Congress |
Political Party |
Percent of Tax Returns Subject to AMT |
Rank |
Additional AMT Tax Liability Per AMT Return |
|
New York |
18 |
Nita Lowey |
Dem. |
13.52% |
1 |
$5,585 |
|
New York |
14 |
Carolyn Maloney |
Dem. |
12.36% |
2 |
$10,417 |
|
California |
14 |
Anna Eshoo |
Dem. |
11.42% |
3 |
$7,951 |
|
California |
30 |
Henry Waxman |
Dem. |
10.96% |
4 |
$7,240 |
|
New Jersey |
11 |
Rodney Frelinghuysen |
Rep. |
10.62% |
5 |
$4,180 |
|
New York |
8 |
Jerrold Nadler |
Dem. |
10.57% |
6 |
$7,354 |
|
Connecticut |
4 |
Christopher Shays |
Rep. |
10.53% |
7 |
$5,235 |
|
New Jersey |
5 |
Scott Garrett |
Rep. |
10.06% |
8 |
$4,113 |
|
New Jersey |
7 |
Mike Ferguson |
Rep. |
9.69% |
9 |
$3,880 |
|
New York |
2 |
Steve Israel |
Dem. |
9.25% |
10 |
$3,482 |
|
California |
48 |
John Campbell |
Rep. |
9.22% |
11 |
$5,714 |
|
New York |
3 |
Peter King |
Rep. |
9.22% |
12 |
$3,576 |
|
New Jersey |
12 |
Rush Holt |
Dem. |
9.02% |
13 |
$3,818 |
|
New York |
19 |
John Hall |
Dem. |
8.84% |
14 |
$3,813 |
|
New York |
4 |
Carolyn McCarthy |
Dem. |
8.59% |
15 |
$3,569 |
|
Maryland |
8 |
Chris Van Hollen |
Dem. |
8.31% |
16 |
$4,248 |
|
New York |
5 |
Gary Ackerman |
Dem. |
7.61% |
17 |
$5,237 |
|
New York |
1 |
Timothy Bishop |
Dem. |
7.56% |
18 |
$3,415 |
|
California |
15 |
Michael Honda |
Dem. |
7.43% |
19 |
$4,386 |
|
Illinois |
10 |
Mark Kirk |
Rep. |
7.19% |
20 |
$4,332 |
Source: Internal Revenue Service; Tax Foundation
[Click here for a full table of all 435 congressional districts.]
Table 2 presents the 20 congressional districts that are least affected by the AMT, as well as their elected congresspersons. Congressional districts in Alabama, Tennessee and Texas dominate the list of least affected areas. Texas’s 29th congressional district is the nation’s least affected district, with just 0.28 percent of all tax returns subject to the AMT. Overall, four districts in Alabama, Tennessee and Texas appear in the bottom 20, while Arizona and Missouri have two districts, and Kentucky, Oklahoma, Mississippi and Florida each have one.
Twelve of the least affected districts are currently controlled by the Democratic Party, while eight are held by Republicans. Only one seat changed hands in the most recent elections, when William Jenkins (R) was replaced by David Davis (R) in Tennessee’s 1st congressional district. Because both lawmakers are from the same party, the overall balance was left unchanged.
Table 2. Twenty Congressional Districts Least Affected by the AMT, 2004
|
State |
Congressional District |
Member of Congress |
Political Party |
Percent of Tax Returns Subject to AMT |
Rank* |
Additional AMT Tax Liability Per AMT Return |
|
Missouri |
4 |
Ike Skelton |
Dem. |
0.53% |
417 |
$3,075 |
|
Kentucky |
5 |
Harold Rogers |
Rep. |
0.53% |
418 |
$3,421 |
|
Florida |
3 |
Corrine Brown |
Dem. |
0.53% |
419 |
$3,913 |
|
Texas |
13 |
Mac Thornberry |
Rep. |
0.52% |
420 |
$3,433 |
|
Arizona |
4 |
Ed Pastor |
Dem. |
0.52% |
421 |
$4,047 |
|
Alabama |
3 |
Mike Rogers |
Rep. |
0.50% |
422 |
$4,531 |
|
Alabama |
2 |
Terry Everett |
Rep. |
0.49% |
423 |
$4,174 |
|
Tennessee |
6 |
Bart Gordon |
Dem. |
0.49% |
424 |
$3,569 |
|
Texas |
19 |
Randy Neugebauer |
Rep. |
0.48% |
425 |
$3,327 |
|
Mississippi |
2 |
Bennie Thompson |
Dem. |
0.48% |
426 |
$2,924 |
|
Arizona |
7 |
Raul Grijalva |
Dem. |
0.48% |
427 |
$2,896 |
|
Missouri |
8 |
Jo Ann Emerson |
Rep. |
0.48% |
428 |
$3,115 |
|
Texas |
20 |
Charles Gonzalez |
Dem. |
0.46% |
429 |
$3,963 |
|
Oklahoma |
2 |
Dan Boren |
Dem. |
0.46% |
430 |
$3,344 |
|
Tennessee |
1 |
David Davis |
Rep. |
0.43% |
431 |
$3,276 |
|
Alabama |
7 |
Artur Davis |
Dem. |
0.41% |
432 |
$3,566 |
|
Alabama |
4 |
Robert Aderholt |
Rep. |
0.40% |
433 |
$3,487 |
|
Tennessee |
4 |
Lincoln Davis |
Dem. |
0.36% |
434 |
$3,552 |
|
Tennessee |
8 |
John Tanner |
Dem. |
0.33% |
435 |
$3,259 |
|
Texas |
29 |
Gene Green |
Dem. |
0.28% |
436 |
$2,213 |
|
* Rankings include the 435 congressional districts and the District of Columbia. |
Source: Internal Revenue Service; Tax Foundation
[Click here for a full table of all 435 congressional districts.]
Factors Affecting the Pattern
The factors that push taxpayers into the AMT are more prevalent in some areas than others, so it is not surprising that some congressional districts are more heavily affected by the AMT.
What pushes taxpayers into the AMT? Because the AMT is a parallel tax code to the ordinary federal income tax, when filing tax returns each April taxpayers must calculate their liability under both systems and pay whichever amount is highest. As a result, anything that decreases ordinary income tax bills or increases AMT tax bills pushes more taxpayers into the AMT. Several factors help explain why some areas are hit harder than others:
Areas with High State and Local Taxes. The regular income tax allows taxpayers to deduct state and local taxes paid from their income when calculating federal tax bills. The AMT does not allow this deduction. As a result, state and local taxes lower taxpayers’ regular income tax bills but not their AMT tax bills. And since taxpayers pay the higher of the two amounts, taxpayers living in congressional districts with high state and local taxes will be harder hit by the AMT.
Number of Children. The regular income tax allows a personal- and dependent-exemption deduction, which lowers ordinary tax bills for those with dependent children. The AMT does not allow these deductions, and requires that taxpayers add them back to taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . When these amounts are added back, taxpayers’ AMT bills rise compared to regular tax bills, throwing them into the AMT. Congressional districts with more dependent children are therefore more likely to be affected by the AMT.
Areas with High Incomes. The AMT affects few taxpayers with very low or very high incomes. Of the taxpayers affected by the AMT in 2004, over 85 percent earned between $100,000 and $500,000. But according to Congressional Budget Office estimates, most growth in the number of returns affected by the AMT will be from taxpayers earning between $50,000 and $200,000 in coming years. As a result, urban congressional districts with relatively high incomes are much more likely to be affected by the AMT.
Use of Other Deductions and Exemptions. The AMT disallows many deductions and exemptions allowed by the regular income tax, including unreimbursed business expenses, certain medical and dental expenses and others. Congressional districts with taxpayers who use more of these types of deductions will therefore be more affected by the AMT.
Income Earned Outside of AGI. Under the AMT, taxpayers are taxed based on a broader definition of income than under the regular income tax. For example, income from incentive stock options is taxed by the AMT but not by regular income taxes. Since this income is taxed by the AMT, it increases AMT tax bills compared to regular income tax bills and pushes taxpayers into the AMT. Congressional districts with taxpayers earning income such as incentive stock options that does not appear in “adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” ” as defined by the ordinary income tax are therefore more likely to be affected by the AMT.
[Click here for a full table of all 435 congressional districts.]
Footnotes
1 See Andrew Chamberlain and Patrick Fleenor, “Backgrounder on the Individual Alternative Minimum Tax (AMT),” Tax Foundation Fiscal Fact No. 26 (May 24, 2005).
2 All data are compiled from the IRS Statistics of Income’s Zip Code Area tables for tax year 2004, available at http://www.irs.gov/taxstats/indtaxstats/article/0,,id=96947,00.html.
3 “AMT tax liability” is equal to the difference between a taxpayer’s ordinary federal income tax liability and their actual tax liability under the AMT.
4 Figures are derived from ZIP-code-level tax data from the IRS. Because postal ZIP codes do not directly correspond to political boundaries, data in ZIP codes crossing multiple districts is allocated based on the percentage of households in each ZIP code appearing in a given congressional district. Overall, roughly 15 percent of ZIP codes cross at least one congressional district boundary.