By Lori Montgomery
Washington Post Staff Writer
Monday, April 23, 2007
House Democrats, aiming to seize taxes from Republicans as a political issue, have come up with a plan to shift the burden of the hated alternative minimum tax onto the shoulders of the nation's richest households.
The proposal, still in its preliminary stages, would attempt to restore the original purpose of the parallel tax structure, which was created in 1969 to nab 155 super-rich tax filers who were using loopholes and deductions to wipe out their tax bills.
Because it was not indexed for inflation, the AMT delivered a significant tax increase to an estimated 3 percent of households this year. Unless the law is changed, it is projected to strike nearly 20 percent of taxpayers when they file returns next spring, many earning as little as $50,000 a year.
House Democrats are trying to craft legislation that would spare those households while providing relief to many current AMT payers. Under a proposal presented last week to Democrats on the tax-writing Ways and Means Committee, families making less than $250,000 a year -- about 98 percent of taxpayers -- would be exempt from the tax. Those earning between $250,000 and about $500,000 would see lower AMT bills, according to Democratic sources who spoke on condition of anonymity because the plan is not final.
To make up the lost revenue, families earning more than $500,000 a year would take a much harder hit from the AMT, as well as other adjustments to the tax code, the sources said. Democrats haven't finalized that part of the proposal. But an analysis by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, suggests that the nation's wealthiest families -- less than 1 percent of all taxpayers -- would have to pay 5 to 13 percent more to offset the revenue lost by exempting the middle class from the AMT, with families who make more than $1 million paying an extra $52,000, on average, each year.
The final package could contain smaller measures, such as raising the standard deduction for married couples, to spread tax relief to 90 million families. That, Democrats said, would establish their credentials as tax-cutters while strongly contrasting with the Republican Party, whose tax cuts since 2001 have disproportionately benefited the wealthy and added billions of dollars to the federal debt.
"A huge number of families will receive tax relief as the result of this. It's something like 87 million to one million," said Maryland Rep. Chris Van Hollen, who chairs the Democratic Congressional Campaign Committee. "It is a great message of fiscal responsibility and economic fairness."
"Taxes can be a winning issue for Democrats," added Illinois Rep. Rahm Emanuel, chairman of the House Democratic Caucus. "And the AMT will be the door through which everyone walks to deal with taxes."
Republicans, who also advocate repealing or substantially rewriting the AMT, dismiss Democratic ideas as "class warfare." Wisconsin Rep. Paul D. Ryan, senior Republican on the House Budget Committee, said raising taxes for the wealthiest Americans would punish small-business owners. He dubbed the idea a "job killer."
Republicans also question the potency of the tax as a political issue, given that most of the people Democrats hope to rescue have yet to feel its bite.
Louisiana Rep. Jim McCrery, the senior Republican on the House Ways and Means Committee, said the Democratic proposal would avoid a tax increase for some, but those people "won't see any more money in their pockets." Meanwhile, "the people who get the tax increase certainly would feel that," McCrery said. "So their proposal could be characterized as a tax increase, and a big one."
Some Democratic strategists also question whether the proposal carries a political advantage. John Irons, director of tax and budget policy at the Center for American Progress, said overhauling the AMT may hold "more danger in it than credit." And pollster Celinda Lake, who has argued that Democrats should develop more cogent economic policies to appeal to middle-class voters, said the AMT is "a little esoteric."
"Most middle-class people aren't being hit with it, and they still think of it as a tax for the wealthy," she said.
Some rank-and-file Democrats have similar concerns. Rep. Allyson Y. Schwartz, who represents a suburban Philadelphia district, said she was among those who argued successfully that any AMT change should provide relief to some of the 4 million families who already pay the tax. That way, she said, "real people will be able to stand up and say, 'I don't have to pay it next year because Democrats understood that it was unfair.' "
To make the AMT work as a campaign issue, however, Democrats recognize that they will have to raise its profile among the approximately 97 percent of families who do not pay it. Emanuel is putting together a strategy.
The AMT is a flat tax with two brackets, 26 and 28 percent, and virtually no deductions. Taxpayers must compute their returns under the regular tax rules with regular deductions, then do it again under the AMT and pay whichever amount is higher.
Its impact is harshest on taxpayers who are married, have children and live in high-tax jurisdictions, including Maryland and the District. Van Hollen's district in suburban Maryland is among the hardest hit. In recent years, the truly rich have been less affected because their regular tax rates are higher than rates under the AMT.
For years, Congress has blunted the impact of the AMT by enacting laws that provide temporary inflation adjustments. The tax has nonetheless grown to ensnare millions of people for whom it was never intended. The most recent of those "patches" expired in December and, unless Congress acts, the number of people hit by the AMT is poised to explode.
Borrowing a page from the Republican playbook that produced the "death tax" and the "marriage penalty," Emanuel rechristened the AMT the "parent penalty" in a recent national radio address. "If you have three kids," he told listeners, "you'll be nearly four times more likely to pay this parent penalty than a childless taxpayer. Is that fair, being penalized for having children?"
Emanuel also noted that President Bush's signature tax cuts have increased the number of potential AMT payers by lowering people's regular tax rates. "Middle-class families making between $75,000 and $100,000 are now more likely to pay the tax than those making more than a million dollars," Emanuel told listeners, adding that Democrats have made the tax "our top priority for tax reform."
Emanuel also has plans to publicize a breakdown of AMT payers by district, so that lawmakers can see how many of their constituents face thousands of additional dollars in taxes. Still to come: Vigorous speeches by House Democrats at Rotary clubs and community centers about the looming threat.
Paul Weinstein, a senior fellow at the Progressive Policy Institute, an arm of the Democratic Leadership Council, says Emanuel is wise to try to define the issue before Republicans can. "If you say we're cutting taxes for the middle class, that is a powerful message," Weinstein said.
Democrat Rep. Earl Pomeroy said the message will resonate even in his home state of North Dakota, where fewer than an estimated 3,000 families paid the AMT this year.
"It's not largely known," Pomeroy conceded. But awareness is growing, he said, and the tax is no longer just "some wacky acronym out of Washington, D.C."
People need to know, he said, that "millions of American families would be getting tax increases as the AMT creeps up and clobbers them. And we're not going to allow that."