Alternative minimum snare

Published: April 15, 2005

FEDERAL TAX law ought to be progressive -- people who earn more money should pay a higher proportion of their income. As the filing deadline beckons today, some taxpayers in Massachusetts who are forced to pay the Alternative Minimum Tax are discovering that this is not always the case. Congress ought to revise the AMT so it achieves its original goal of affecting only the wealthiest taxpayers.

By 2003, according to the nonprofit Tax Policy Center, 89,000 taxpayers in Massachusetts were affected by the AMT, which was passed by Congress decades ago to target high earners who were legally avoiding all federal income taxes. The AMT has never been adjusted for inflation, and it is starting to gnaw far beyond its original intent. By 2010, according to the Tax Policy Center, one-third of households in the state will pay taxes under this law.

A flat rate of 26 percent is usually applied to taxable income under the AMT. As the AMT comes to affect more people -- even those earning $50,000 a year -- the progressivity built into current federal income taxes will gradually be eroded.

President Bush and congressional Republicans have already undermined the system's progressivity by cutting the top income tax rate from 39.6 percent in 2000 to 35 percent now. They've also reduced the rate on most capital gains, which affects assets held disproportionately by wealthy people, from as high as 28 percent a decade ago to 15 percent now.

According to the Tax Policy Center, the top quintile (20 percent) of taxpayers now pay out 21.4 percent of their income in federal taxes, compared with 17.7 percent for the second-highest quintile and 13.5 percent for the third-highest. As the AMT bites deeper, these differences will narrow.

Representative Bill Thomas, a California Republican who heads the House Ways and Means Committee, said in November that he smiles when he hears complaints about the AMT. He says he looks forward to using it as a lever for fundamental changes in the tax code. Thomas is not saying what he wants to do, but other Republicans have been pushing a flat tax, in which everyone would pay the same rate after an initial exemption. The flat tax is the antithesis of fairness.

Over the next few years, the AMT will bite deeper in states whose residents have higher incomes and take bigger tax deductions, such as Massachusetts. Most such states voted against President Bush. Later, many taxpayers in Republican states will be affected as well.

By indexing it for inflation, or other methods, the AMT should be fixed, not used as an excuse to skew the tax code further in favor of the wealthy.