Alternative Maximum Foot Dragging

Published: December 23, 2005

The season for celebration is nearly upon us. After all, Congress is preparing for recess, and soon our representatives will flee the capital, unable to fund any more bridges to tiny Alaskan islands, or finagle any of 6,375 similar endeavors spelled out in the transportation bill, or in any other bill for that matter. Soon, it will be the most wonderful of seasons, and Congressmen will have only the lobbyists to shake down as they enter the New Year. It is truly a time to sing ?Hallelujah.?

At least, most years it is. But this year, we might want to give Congress another week, even at the risk they authorize a series of snow sheds for Death Valley. That?s because it looks like Congress will leave town with the Alternative Minimum Tax still on the books, which left alone, will spread like a flu virus in summer camp. That is, it will eventually get to everyone.

You?ve got to hand it to Congress; the Alternative Minimum Tax is a cleverly named piece of legislation. However, a more accurate name would have been ?The Other Higher Tax? or ?The Not So Fast You Owe Even More Tax.? That?s because the AMT is a second take on an individual?s income tax calculation. And if the taxes come out higher under this alternate scenario, then that?s the way the deduction crumbles. Also clever - just like higher property taxes, increases in the AMT are conveniently absent from the CPI.

For years, only rich people like lawyers and professional athletes had to worry about these alternate tax calculations. The tax was mainly designed to keep rich people with a smorgasbord of deductions from getting off without paying anything. But because the AMT was never indexed for inflation (surely an oversight), the tax is trickling down into the upper middle and middle classes.

Taxpayers have been shielded from the full whammy of the AMT thanks to cobbled together exemptions over the years. Even so, an estimated 3-4 million households will have to pay the AMT version of income taxes this year. Worse, the latest exemption expires this year, and if Congress doesn?t address the AMT between bridge building sessions, about 18 million Americans will step into the AMT?s snare in 2006. Already, according to the Tax Policy Center, those who draw the short straw of the AMT this year will fork over an additional $4,500 to the IRS. According to Time magazine, by 2007, 64% of all households making between $100,000 and $200,000 will be sucker punched by the AMT.

That is, if Congress does nothing - for a change.

Harder and harder to quit

The problem with doing nothing is that the longer nothing gets done, the harder it will be for Congress to do something. That?s because the AMT is starting to gin up real money. According to Investor?s Business Daily, the AMT will generate more revenue than the real income tax by 2008. In other words, in just a few years, the government will lose less revenue by ditching the entire tax system and keeping the AMT rather than the other way around.

So will Congress do something instead of nothing? Maybe failing to index the AMT was not an oversight after all.

Speaking of doing nothing, local and state governments are reaping a windfall from property taxes by doing just that. Nothing. According to CNN/Money and the BEA, property tax revenues are up 34% five years. For the record, they have grown three times faster than inflation and about 50% faster than sales-tax receipts.

Some governments are even offering rebates. New York City gave back $400 to property owners the last two years, and New Mexico is giving back up to $289 of state income taxes owed. But homeowners elsewhere shouldn?t stand there with their hands out when they could be using them to cover their wallets. That?s because states shortchanged local governments in the lean times by forcing them to paying an increasing share of public expenditures, particularly school funding.

And states still don?t consider themselves flush. According to Stateline.org, even though general tax revenues beat expectations in every state during fiscal 2005, prior budgets cuts have left them with a wish list longer than a Beverly Hills teenager?s. Stateline figures that state revenues would have to grow by more than 9% every year until 2008, just to get state services back to pre-recession levels. For the record, the normal rate of state revenue growth is closer to 5.6%.

So maybe Congress will deliver AMT tax relief just as states figure out how to lighten the property tax load for their beleaguered citizens, and while they are at it, discover how to balance the current budget while preparing to fund future liabilities sans tax increases.

And if you believe that, then Congress is through building bridges to nowhere.