Reform the AMT

The alternative minimum tax is set to pummel the middle class. Fix it.

Published: November 29, 2005

Despite spiraling government obligations, Republicans in Washington are united in their passion to cut taxes. Again. Where they part company is on whose taxes to cut.

For hard-pressed, middle-income families, there's only one priority that makes sense: The alternative minimum tax has to be curtailed. Unless Washington shields taxpayers from AMT creep, millions of working families will pay higher taxes, while the breaks go mainly to millionaires.

This is not the best time for more tax cuts. The occupation of Iraq, the recovery from Hurricane Katrina and the new Medicare prescription drug benefit are driving government costs higher. But President George W. Bush and congressional Republicans are hell-bent on tax-cutting. The House and Senate each recently passed tax-cut reconciliation bills to slash a number of business taxes, extend the savers' credit and deductions for charitable giving and state and local taxes. After that, the two bills part company.

The Senate's $59-billion five-year bill has a $27-billion one-year AMT fix. It would drive the majority of tax relief to people with incomes of less than $200,000 a year, according to the Brookings-Urban Institute Tax Policy Center.

The biggest-ticket item in the House's $63-billion, five-year bill is a $22-billion, two-year extension of the current break on taxes on capital gains and stock dividends. The House bill would lavish 40 percent of its tax relief on those with incomes of $1 million or more a year, while doing nothing to restrain the AMT. That approach would mean higher taxes for 18 million people in 2006 due to the AMT. The biggest losers? Families with children who live in high-tax localities, such as Long Island and New York City.

Middle-income Americans have been spared that hit by a series of one-year AMT adjustments. But House tax-cutters say they prefer to address the AMT as part of a broad tax code overhaul. There's a certain logic to that approach, but one big catch: Tax reform is going nowhere soon.

With Congress entering an election year and Bush rushing toward lame-duck status, sweeping changes in the tax code will probably have to wait for some subsequent administration. That's too long to delay relief from the AMT, which is an alternative method for computing income taxes that was designed to keep the wealthy from getting off tax-free but, because of inflation, has reached deep into the middle class. If this round of tax cuts doesn't include AMT relief, it will be a tax cut for the rich paid for by tax hikes for the rest of us.

That can't be what most taxpayers want.