Bush panel backs tax overhaul

Efforts to repeal the alternative minimum would necessitate devising other options to replace lost revenue

Author: Tami Luhby

Published: July 21, 2005

Middle-class Americans should be spared paying the alternative minimum tax, a presidential panel said yesterday.

The tax reform panel intends to endorse repealing the alternative minimum - the first of its tax overhaul recommendations. But it must also find ways to make up for the $1.2 trillion in tax revenue that would be lost.

Originally intended to ensure the wealthy pay their fair share, the alternative minimum tax is increasingly affecting middle-class taxpayers because it isn't indexed to inflation.

New Yorkers are particularly hard hit because of high property and state and local taxes.

Some 3.8 million taxpayers will be subject to the alternative minimum tax when they file their taxes next April, 13 percent of whom have incomes of $100,000 to $200,000, according to the Treasury Department.

"The AMT has failed to achieve its original objectives and has become a burden on millions of middle-class Americans," said chairman Connie Mack, a former U.S. senator from Florida, at a meeting of the panel yesterday in Washington. "It will continue to sweep in millions of unsuspecting hardworking Americans and their families, unless we do something to stop it."

Unless Congress extends a provision increasing the exemption amount, an estimated 20.5 million taxpayers will be hit with the AMT next year, requiring them to pay an average of $2,736 more in taxes. This includes more than 75 percent of those with incomes of $100,000 to $200,000.

Efforts to repeal the alternative minimum tax, however, have never gotten far on Capitol Hill. The primary obstacle is the loss of tax income.

"The simplest answer is to eliminate the individual AMT altogether," Mark Garay, director of tax policy service at Deloitte Tax in Washington, said in an interview. "The hardest part, however, is figuring out how to pay for it."

Options under discussion include increasing the tax rates or eliminating some tax benefits, such as the deductions for mortgage interest or the tax deferral of retirement contributions and earnings.

A total repeal, however, also would allow the wealthy to escape paying taxes - which doesn't sit well with some panel members and some metro area residents who've been hit hard.

Alan Lichtenstein, a retired assistant principal from Commack, said the alternative minimum tax should be indexed to inflation so it's confined to the rich.

"Fix it so it does the job it's supposed to do," said Lichtenstein, who last year had to pay in excess of $3,000 more in taxes because of the tax.

Some tax experts say that Congress soon will be forced to address the issue.

"The AMT will start hitting so many people, Congress will have no other choice," said Gene Steuerle, co-director of the Tax Policy Center of the Urban Institute and Brookings Institution.