Democrats Look for Permanent AMT Fix
Thursday, March 8, 2007
Key House leaders are pushing to sharply limit the scope of the alternative minimum tax, providing relief to many families who already pay the unpopular levy as well as millions more who would be hit for the first time next year.
The proposal being crafted by Democratic lawmakers would halt the relentless expansion of the tax, which was created in 1969 to target 155 super-rich tax dodgers. Because it was not indexed for inflation, the tax is projected to ensnare 4.2 million families when they calculate their taxes next month.
Unless the law is changed, an additional 19 million households, many earning as little as $50,000 a year, would pay the tax in 2007, as would nearly half of all taxpayers by 2017.
House leaders say they are crafting a permanent fix that, unlike previous efforts to tame the tax, would prevent it from springing back to life down the road.
"This system originally designed to catch millionaires who were avoiding taxes with excessive deductions has gone seriously awry. It is my intention to offer a permanent solution to AMT," Rep. Richard E. Neal (D-Mass.), chairman of the House Ways and Means subcommittee on select revenue measures, said yesterday during the first of two hearings on the issue.
Neal declined to say how Democrats plan to replace the lost revenue. Eliminating the tax entirely would cost the Treasury from $872 billion to $1.6 trillion over the next decade, by various estimates. House Ways and Means Chairman Charles B. Rangel (D-N.Y.) has said he is looking to "rearrange" the Bush tax cuts of 2001 and 2003, shifting tax relief from the wealthiest beneficiaries to the middle-class victims of the AMT.
"We may be talking about redirecting those tax cuts," Rangel said this weekend on "Fox News Sunday." "Within the system, there can be more equity without increasing the tax burden."
Republicans have assailed that idea. "If House Democrats want to turn this into a class-warfare vehicle, they are going to face fierce resistance from Republicans," said Rep. Phil English (R-Pa.), the ranking Republican on the revenue subcommittee and an advocate of repealing the AMT. "We're not going to allow our pro-growth tax policies that are expanding the economy to be held hostage to an AMT fix."
Republicans, like Democrats, want to rein in the AMT. The president included $50 billion in his most recent budget proposal to prevent the tax from spreading in 2007 much beyond the 4.2 million families expected to owe it for 2006. But the president's five-year budget plan would permit the number of AMT taxpayers to explode again in 2008. Administration officials have said they want to permanently restructure the tax and replace the lost revenue but have offered no suggestions for how to do it.
"We look forward to working with this committee and others in the Congress on a permanent solution to this difficult and important issue," Assistant Treasury Secretary Eric Solomon told the Ways and Means panel.
At the same time, the White House is urging Congress to extend Bush's tax cuts beyond their 2010 expiration date. At yesterday's hearing, Democratic lawmakers emphasized testimony from one witness: Leonard E. Burman, director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who said the tax cuts are amplifying the effect of the AMT.
"The tax cuts have doubled the size of the problem," Burman said.
The AMT is a type of flat tax with two brackets, 26 and 28 percent, and virtually no deductions; there is a large personal exemption that is not indexed to grow with inflation. Taxpayers must compute their taxes under the regular tax rules with regular deductions, then do it again under the AMT. They must pay whichever amount is higher.
The impact is harshest on taxpayers who are married, have children, live in high-tax jurisdictions, including Maryland and the District, and have annual incomes of $100,000 to $500,000. In recent years, the truly rich have been little affected because their regular tax rates are now higher than the rates under the AMT.
For many families, the Bush tax cuts lowered their regular tax bills sufficiently to push them into the AMT, Burman said. In This tax year, he said, AMT taxpayers would number only about 10.2 million families if not for the tax cuts; instead, 23 million households are projected to owe an extra $6,800, on average.
In the future, the AMT would march further down the income scale, Burman and others said, hitting a growing portion of the middle class. By 2010, half of all married couples with children will be paying the tax, according to new estimates from the Joint Committee on Taxation, including 70 percent of those earning $75,000 to $100,000 a year.
Senate Democrats are also wrestling with the AMT. Senate Budget Committee Chairman Kent Conrad (D-N.D.) said he plans to include in his budget blueprint a proposal to halt the expansion of the AMT until 2009, one year longer than the president. Senate Finance Committee Chairman Max Baucus (D-Mont.) is working to come up with the cash to pay for that plan, but a Baucus aide said he remains open to a more permanent solution.