Report Lists Possible Alternatives To Widely Disliked Minimum Tax

Few topics stir greater bipartisan consensus than the alternative minimum tax. Almost everybody hates it and wants it to go away.

Losing the tax without losing enormous sums for the U.S. Treasury would require drastic changes in the federal tax code, according to a report scheduled to be released today. The possibilities include repealing a cherished deduction, significantly increasing taxes for the wealthy or raising income tax rates 6 percent across the board.

And that assumes President Bush's tax cuts would be allowed to expire on schedule in 2010. If the tax cuts were extended, the report says, repealing the tax, known as the AMT, would become even more difficult.

"This is going to take some political leadership," said one of the report's authors, Leonard E. Burman, director of the Tax Policy Center, a project of the Urban Institute and the Brookings Institution. "Somebody's got to explain to people why this tax makes no sense, that we've been counting on it for a bunch of money, and that we've got to come up with" other sources of revenue.

The AMT is a parallel tax structure created in 1969 to prevent the super-rich from using deductions and shelters to avoid paying taxes. But it was not designed to consider inflation. So a tax that hit fewer than 400,000 families in 1985 is expected to ensnare 3.8 million households at tax time in April, raising their tax bills by an average of $6,813, according to the Tax Policy Center.

Next year, the number of families affected would rise to 23 million unless the law is changed.

After Democrats won control of Congress last fall, they put fixing the AMT at the top of their agenda. The White House, too, has called for a change but has never offered specifics.

In simple terms, the AMT is sort of a flat tax with two brackets, 26 and 28 percent, and few deductions. Taxpayers must compute their taxes under regular rules and under the AMT, and pay whichever is higher. The impact is harshest on taxpayers who are married, have children, live in high-tax states and have incomes of $100,000 to $500,000. The truly rich are little-affected because their regular rates these days are higher than the AMT.

In their report, Burman and his co-authors lay out 23 options for repealing or reforming the AMT. Most would have little impact on the after-tax incomes of most families -- many would, in fact, cut taxes a bit on the middle class while imposing relatively small increases on families with the highest incomes.

But some of the options would make for poor TV sound bites. One calls for a 6 percent tax increase that would immediately raise the top rate under the regular income tax to 37 percent from 35 percent, and to 41.9 percent starting in 2011. Another calls for a 24 percent increase in the top three income tax brackets, which would raise the top rate to 43.5 percent.

Burman's favorite option is eliminating the deduction for state and local income taxes, which would generate enough cash to repeal the AMT and cut the regular tax rate by 2 percent across the board.

Will Congress act on any of these ideas?

"I see no evidence of any politicians looking at the more painful kinds of choices we're laying out here," Berman said.