Fix This Tax

Published: April 10, 2004

IMAGINE THAT you're a homeowner and you know your roof needs replacing. Rather than do that, you climb up each year and nail down another piece of tar paper to get through the season. The problem remains, and eventually you're going to have to deal with it.

This is essentially the way that policymakers are handling a tax problem that sounds arcane but is set to ensnare a growing number of people, so much so that the IRS's national taxpayer advocate has termed it the nation's number one tax problem. It's the alternative minimum tax (AMT), which was designed to capture wealthy individuals who managed to wriggle their way out of paying taxes. Because the tax isn't indexed for inflation and because the 2001 tax cut lowered regular tax rates, the AMT is about to affect millions of taxpayers that everyone agrees were never intended to have to pay its rather hefty assessments. By 2010, if nothing's changed, 97 percent of married taxpayers with at least two children and incomes between $75,000 and $100,000 will be subject to the AMT.

Instead of tackling what everyone agrees is a serious tax problem, the Bush administration has proposed a continuing series of short-term patches -- the tax equivalent of another sheet of tar paper tacked to the roof. Its budget for next year would merely extend the temporary fix (raising the amount of income that is exempt from the AMT) for another year. That not only doesn't deal with the underlying problem, it helps mask the true cost of President Bush's proposal to make his tax cuts permanent -- because the AMT, if left to take effect, would recover a good chunk of that tax relief. Not that Democratic presidential candidate John F. Kerry deals with the problem much more forthrightly: His budget proposal also doesn't include any long-term fix for the AMT.

To understand how much that is needed, consider: In 1999, about 1 million taxpayers were subject to the AMT. By the end of the decade, the tax is expected to hit 33 million taxpayers -- about one-third of all taxpayers, according to calculations by the Urban-Brookings Tax Policy Center. Moreover, the tax doesn't function fairly. It penalizes couples, because it has a large built-in marriage penalty. It penalizes taxpayers with children, because that's one of the exemptions it wipes out. It penalizes taxpayers with high state and local tax bills, like many in this area, for the same reason.

There are sensible ways to fix the AMT. The tax could be indexed for inflation; taxpayers could be permitted to deduct dependents and take credits for things like education and child care. But such fixes carry a big price tag. They would cost $450 billion over the next decade if the Bush tax cuts are left to expire in 2010, as provided under current law, according to the Urban-Brookings Tax Policy Center. If the cuts are made permanent, as Mr. Bush wants, the cost would be $780 billion. Taxpayers, though, aren't going to tolerate -- nor should they -- being swept into an alternate tax universe that hits them with big, unanticipated bills. It's time for policymakers in both parties to stop the patching and budget, realistically, for a long-term fix.