The 'Anti-New York Tax' Lives On

Author: James Toedtman

Published: September 22, 2002

Washington

This is a story of how a good idea was sabotaged by public opinion, high technology and money. And as a result, New Yorkers are getting gouged.

The Treasury Department's disclosure in 1969 that 155 people making more than $200,000 paid no federal income taxes in 1967 generated more angry congressional mail than the Vietnam War. The ensuing firestorm produced an add-on tax that forced wealthy taxpayers to pay at least 10 percent tax on their income.

That fine-tuned assault on 155 tax dodgers has been refined and is now called the alternative minimum tax. But the number of people captured by the AMT is exploding - to 2.6 million this year, and 41 million in a decade, according to a new study by Len Burman of the Urban Institute and William Gale of the Brookings Institution. It is also hitting more middle income taxpayers.

The AMT starts with the premise that everyone should pay a percentage of their income in taxes, and if you don't meet a minimum tax level, you must recalculate your taxes without claiming tax credits, deductions and exemptions. It's the recent explosion of tax credits - for child care, for IRAs, for education, for job training and for adoption - along with higher local taxes and inflation that have increased the number of taxpayers on the AMT scope.

The problem is especially acute for New Yorkers, with their high mortgage interest and high property taxes. Both are deductible for standard income tax calculations, but they are not deductible in the AMT calculations. Robert McIntyre, director of the Center for Tax Justice, estimates that three-quarters of New York taxpayers will be forced to pay the AMT by the end of the decade.

"The alternative minimum tax might as well be called the anti-New York tax. It hits middle-class New York families more than it hits many wealthy people from any other part of the country," said Rep. Charles Rangel (D-Harlem). But he concedes there's no momentum for correcting it.

The roots of the problem are public opinion, high technology and money.

Public reaction to the 1969 disclosures triggered a crackdown on the well-heeled, but it also unleashed a new generation of financial engineers who created loopholes. Reports that former President Richard Nixon had capitalized on the loopholes and only paid $792 in 1970 and $878 in 1971 on a $200,000 salary provoked more anger and a series of minor fixes before a 1986 overhaul eliminated all shelters.

By that time, though, public alarm turned to budget deficits, which put a premium on new programs like tax credits that didn't involve new spending.

Technology and money worked together to compound the problem. Computers enabled calculations of the cost of every tax proposal, and taxwriters learned that adjusting the AMT was expensive. As a result, when tax brackets were indexed to inflation in 1986, tax brackets for the AMT remained constant. "It was always money. It would have cost $1 billion to $2 billion in 1986. But they could never afford it."

Meanwhile, inflation drove the impact of the AMT lower and the cost of fixing the problem higher. A $100,000 household income two decades ago qualified as high income, Gale said. "I regard a $100,000 income today as middle class - a cop and a postal worker," he said. Meanwhile, the cost in the next decade of eliminating the AMT is $913 billion. "Every year you put off fixing the AMT increases the cost," Burman said.